SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                 ---------------

                                    FORM 10-K
                 Annual Report Under Section 13 or 15(d) of the
                     Securities Exchange Act of 1934 For the
                       fiscal year ended December 31, 1995

                          Commission File Number 1-4373

                            THREE-FIVE SYSTEMS, INC.
                            ------------------------
                    (Name of Issuer Specified in Its Charter)

          Delaware                                                86-0654102
-------------------------------                              -------------------
(State or Other Jurisdiction of                               (I.R.S. Employer
Incorporation or Organization)                               Identification No.)

1600 North Desert Drive, Tempe, Arizona                                 85281
---------------------------------------                                 -----
(Address of Principal Executive Offices)                             (Zip Code)

                                 (602) 389-8600
                                 --------------
                (Issuer's Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act:

         Title of Each Class           Name of Each Exchange on Which Registered
         -------------------           -----------------------------------------

Common Stock, Par Value $.01 Per Share              New York Stock Exchange
--------------------------------------              -----------------------

Securities registered under Section 12(g) of the Exchange Act:  None

         Check whether the issuer (1) has filed all reports required to be filed
by  Section  13 or 15(d) of the  Exchange  Act during the past 12 months (or for
such shorter  period that the  registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days. 
                    Yes  [X]      No [ ]

         Check if there is no disclosure of delinquent  filers  pursuant to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]

         State issuer's revenues for its most recent fiscal year.  $91,585,000

         As of March 5, 1996,  the  aggregate  market  value of the voting stock
held by  non-affiliates  of the issuer,  computed by  reference  to the price at
which stock was sold as of such date in the stock  market as reported on the New
York  Stock  Exchange,  was  $115,303,557.  Shares of Common  Stock held by each
officer and director and by each person who owns 10% or more of the  outstanding
Common  Stock  have  been  excluded  in that  such  persons  may be deemed to be
affiliates. This determination of affiliate status is not necessarily conclusive
and does not constitute an admission of affiliate status.

         As of March 5, 1996, there were 7,736,345 shares of the issuer's Common
Stock outstanding.

         Documents   incorporated   by  reference:   Portions  of  the  issuer's
definitive  Proxy  Statement  for the 1996 Annual  Meeting of  Stockholders  are
incorporated by reference into Part III hereof.
<PAGE>
                            THREE-FIVE SYSTEMS, INC.

                           ANNUAL REPORT ON FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 1995

                                TABLE OF CONTENTS



                                     PART I

ITEM  1.  DESCRIPTION OF BUSINESS....................................1
ITEM  2.  DESCRIPTION OF PROPERTY...................................15
ITEM  3.  LEGAL PROCEEDINGS.........................................15
ITEM  4.  SUBMISSION OF MATTERS TO A VOTE 
          OF SECURITY HOLDERS.......................................15

                                     PART II

ITEM  5.  MARKET FOR COMMON EQUITY AND RELATED 
          STOCKHOLDER MATTERS.......................................16
ITEM  6.  SELECTED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION
          AND ANALYSIS..............................................17
ITEM  7.  FINANCIAL STATEMENTS......................................22
ITEM  8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE.......................22

                                    PART III

ITEM  9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND 
          CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
          OF THE EXCHANGE ACT.......................................22
ITEM  10. EXECUTIVE COMPENSATION....................................22
ITEM  11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL 
          OWNERS AND MANAGEMENT.....................................22
ITEM  12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............22

                                     PART IV

ITEM  13. EXHIBITS AND REPORTS ON FORM 8-K..........................22

SIGNATURES..........................................................24
<PAGE>
ITEM 1.  DESCRIPTION OF BUSINESS

Introduction

         The Company  designs and  manufactures  a wide range of user  interface
devices for operational control and informational  display functions required in
the end  products  of original  equipment  manufacturers  ("OEMs").  Most of the
Company's sales consist of custom devices developed in close  collaboration with
its customers. Devices designed and manufactured by the Company find application
in cellular  telephones and other wireless  communication  devices as well as in
medical  equipment,  office automation  equipment,  industrial process controls,
instrumentation,   consumer  electronic  products,   automotive  equipment,  and
industrial and military control products.  The Company currently  specializes in
liquid crystal display  ("LCD") and light emitting diode ("LED")  components and
technology in providing its design and manufacturing services for its customers.
The Company markets its services  primarily in North America,  Europe,  and Asia
through direct technical sales persons and, to a much lesser extent,  through an
independent sales and distribution network.

         The  Company  has  experienced  substantial  growth over the last three
years with net sales  increasing  from $38.0 million in 1993 to $91.6 million in
1995 and net income increasing from $5.1 million in 1993 to $8.4 million in 1995
as the  Company  has  participated  in the  substantial  growth in the  wireless
communications  market.  As a  result  of its  growing  operations,  in 1995 the
Company  completed  the  construction  of a new facility in Tempe,  Arizona,  to
consolidate its U.S. design, manufacturing,  research, development, engineering,
marketing,  and corporate  operations  and to house one of the largest LCD glass
production  facilities  in North America  which,  when fully  operational,  will
enable  the  Company  to  produce  a  substantial   portion  of  its  LCD  glass
requirements.

         The Company  believes that it is positioned to continue its growth as a
result of its strength in designing, prototyping, and producing, on a timely and
cost-efficient basis, a wide range of innovative,  distinctive, and high-quality
user  interface  devices  required in the end  products of OEMs.  The  Company's
design  processes  utilize  advanced  computer-aided  design software to provide
custom  solutions for customers'  products in time frames and on cost-bases that
it believes are substantially  shorter and lower priced than industry norms. The
Company utilizes flexible  manufacturing systems that can accommodate low-volume
production runs or highly sophisticated applications in Arizona and high-volume,
price sensitive runs in Manila, the Philippines.

         The Company  maintains  its principal  executive  offices at 1600 North
Desert Drive, Tempe,  Arizona 85281, and its telephone number is (602) 389-8600.
Unless the context indicates otherwise, all references to the "Company" refer to
Three-Five Systems, Inc., its subsidiaries and predecessors.

Technology

         Since the commercial introduction of the first light emitting diodes in
the 1960s and twisted nematic liquid crystal  displays in the 1970s,  the use of
LCD  and LED  indicators  has  become  widespread  in  industrial  and  consumer
electronic  products.  Prior to these  innovations,  the most common displays or
indicators had substantial  limitations as to their use,  especially in terms of
size and life.  LCD and LED  technologies  were  developed  in order to overcome
these limitations.

         An LCD modifies light that passes through it rather than emitting light
like an LED. An LCD generally  consists of a layer of liquid crystals  suspended
between two glass plates. The crystal aligns itself in a predictable manner when
stimulated  electrically.  This alignment produces a visual  representation when
used in conjunction  with a polarizer and either  natural or artificial  ambient
light.
         An LED chip produces  light as the result of the  application of direct
current at a low voltage.  Different  wavelengths  (colors) can be produced in a
product depending upon the manufacturing process and the dopant (impurity) added
to the gallium arsenide or gallium phosphide wafer that makes up the chip. These
wavelengths are classified as visible or non-visible.  In the visible range, LED
chips produce red, yellow, and green colors.
                                        1
<PAGE>
In the non-visible range (infrared), the Company's devices utilize 880 nanometer
wavelength or 940 nanometer wavelength chips.

Industry Overview

         The Company has benefitted  from the  determination  by certain OEMs in
the  electronics  industry to  outsource  the design and  production  of certain
components  included  in their  end  products.  The  Company  believes  that the
following factors have contributed to this growing trend among OEMs:

         o As technology has become  increasingly  sophisticated and complex, it
           has become more  difficult  for even the leading OEMs to maintain the
           necessary technology,  expertise,  personnel, and equipment to design
           and produce  internally all of the various  components  necessary for
           their products.

         o Advanced design and  manufacturing  procedures  require  increasingly
           greater  investments  for research and  development,  personnel,  and
           equipment.

         o Competitive  market  conditions  require OEMs to reduce the period of
           time from product  conception  to delivery,  to  differentiate  their
           products   from  those  of  their   competitors,   to  improve   user
           friendliness,  and  continually to enhance  product  performance  and
           reduce product cost during the life cycle of the product.

         OEMs often design  their  products to contain  user  interface  devices
(including those relating to operational control and informational display) as a
low-cost but highly  effective  means of  differentiating  their  products  from
competing  products.  OEMs  then  face the  choice of  whether  to use  standard
devices,  to design and produce the devices  in-house,  or to  outsource  with a
third party for design and production. In making this decision,  companies often
recognize that their greatest strengths consist of consumer recognition of brand
names, market research and product development  expertise,  and highly developed
sales and  distribution  channels.  OEMs also recognize that the desired devices
often  cannot  be  obtained   "off-the-shelf"  and  that  time  constraints  and
limitations  on available  resources  often preclude them from  maintaining  the
specialized in-house expertise and equipment necessary to design and manufacture
the desired  devices.  OEMs often conclude that the logical solution is to focus
their resources on those areas (such as marketing and  distribution)  where they
possess the greatest  leverage and to outsource  the  production  of devices and
components in which they lack the requisite technology and expertise.

         Outsourcing enables OEMs to obtain the following desired benefits:

         o To gain access to specialized design and manufacturing technology and
           expertise.

         o To   accelerate   the  design   process  and  to  reduce  design  and
           manufacturing   costs  by  utilizing   the   specialized   personnel,
           equipment, and facilities of the supplier.

         o To  reduce  their  own  investment  in  personnel,   equipment,   and
           facilities   necessary   for   specialized   design  and   production
           capabilities.

         o To streamline their own operations by  concentrating  their resources
           on the design, production, and distribution of their core products.

         By eliminating the duplication and overlap of investment and resources,
outsourcing  permits  the OEMs and the  Company to work  together  and grow at a
faster rate than would  otherwise be possible.  Outsourcing  greatly reduces the
Company's need to devote time and resources on market  development  for specific
products  and  allows the  Company  to  concentrate  on the  development  of its
technology and its application to a multitude of products.

                                        2
<PAGE>

Products and Services

         The Company currently emphasizes custom designed user interface devices
for operational  control and informational  display functions,  but also designs
and produces  standard or  "off-the-shelf"  devices.  The Company  believes that
custom  devices  represent  the  source  of  its  greatest  profits  and  growth
potential.  For each custom device, the Company works directly with its customer
to develop and  produce the  original  design and to  manufacture  the device in
accordance with the customer's specifications.  Standard devices involve designs
that are adaptable to various fixed end uses without modification.

         The  Company  pursues a strategy  designed  to enable it to enhance its
position as a major, worldwide supplier of custom-designed and manufactured user
interface   devices  for  products  of  leading  OEMs  in  various  high  growth
industries.  The  Company  attempts  to  identify  industries  that  present the
greatest long-term  potential for growth at any given time. The Company seeks to
establish  strong  and  long-lasting  customer  relationships  by  aligning  its
prospects with those of its customers and by seeking to make its engineering and
production  staff  seamless  extensions  of the  product  design and  production
departments  of  its  customers.  The  Company  engages  in a  careful  customer
selection process because it recognizes that its own growth and development will
be closely  aligned with the growth and  development of the customers it serves.
Current targeted  industries include the areas of cellular  telephones and other
wireless  communications,  office  automation,  medical devices,  and industrial
process controls.

Custom Devices

         LCD and LED custom  displays  currently  account for  approximately  94
percent of the Company's revenue. A manufacturer of a complete system or product
requiring  a specific  type of visual  display  (such as a  cellular  telephone,
medical  instrument,  business  machine,  or hand-held data  collection  device)
represents a typical buyer for a custom device.

         The Company has developed a  sophisticated  design  process to meet the
specific needs of its  customers'  applications.  Each design  project  normally
involves a team of Company engineers who are assigned to a customer program. The
team  consults  with the  customer's  engineers  throughout  the  design  phase,
prototype  development,  and  manufacturing  process.  The Company  continues to
supply  engineering  support  after the design  solution has been  developed and
integrated into the manufacturing process.

Standard Devices

         Standard devices encompass a wide variety of LCD and LED devices having
varied  applications.  "Visible" LCD and LED standard  devices include (i) solid
state lamps used for indicators,  status lights,  on-board circuit monitors, and
instrumentation;  (ii) single and dual digit displays and multi-digit  numerical
displays   used  for   calculators,   industrial   controls,   data   terminals,
instrumentation   timers,   hand-held  instruments,   event  counters,  and  PCB
diagnostics;   (iii)  integrated  displays  (with  on-board  integrated  circuit
drivers) and alpha numeric displays used for hand-held terminals, minicomputers,
telecommunications, and instrumentation word processors; (iv) bar graph displays
used for power meters in stereo systems,  Ham and CB radio meters,  VU meters in
tape recorders,  process control meters and  replacements  for edge meters;  (v)
multi-digit numeric displays used for industrial controls, data terminals,  test
equipment, point of sale, mini-computer readout, and home consumer applications;
and (vi) clock modules used for clock radio timers,  alarm clocks,  desk clocks,
auto, marine and aviation clocks,  portable  instruments,  and  time/temperature
displays.

         Standard  infrared  devices  include (a) infrared  emitters and silicon
detectors  used for TV remote  controls,  disk drives,  tape  drives,  printers,
encoders,  solid  state  relays,   photoelectric  controls,   slotted  switches,
reflective switches,  intrusion alarms,  touch screens,  wireless data entry and
positioning sensors;  and (b) optocouplers used for AC power controls,  DC power
controls, solid state relays, logic to power interfaces and power supplies.

                                        3
<PAGE>
Manufacturing Services

         The Company has geographically organized its manufacturing capabilities
in a manner that optimizes the  combination  of technology and human  resources.
This enables the Company to compete  solely on the basis of cost,  if necessary,
with suppliers of similar products and services  throughout the world.  Advanced
manufacturing  techniques  include  surface mount  technologies,  chip-on-board,
chip-on-flex,  flip-chip,  tape automated  bonding,  and  sophisticated  testing
systems throughout the process.  The Company maintains at each of its facilities
quality systems and processes that meet or exceed the demanding standards set by
leading OEMs in targeted industries.

         The Company  seeks to increase its value to its  customers by providing
responsive,  flexible,  total  manufacturing  services.  To date,  manufacturing
services have been  concentrated  toward the manufacture of LCDs and assembly of
Company-designed  user interface  module  assemblies.  However,  the Company has
recognized an increased demand for extended  manufacturing services beyond these
core services. These services may include adding additional components,  such as
a keypad,  microphone,  card reader,  product housing, or non-display electronic
sub-assembly, or the turn-key manufacture of a complete OEM product. The Company
intends to pursue these extended manufacturing opportunities when it can perform
such services at acceptable margins.

Manufacturing Facilities

         The  Company  currently  conducts  manufacturing  operations  in Tempe,
Arizona and in Manila,  the Philippines.  The Company completed the construction
of its new principal U.S.  facility in March 1995. See "Description of Property"
contained in Item 2 of this  Report.  The Arizona  facility  houses a Class 1000
"clean room" and LCD fabrication and prototyping operation. The Company utilizes
the  facility  primarily to conduct LCD  research  and  development,  to produce
prototype and pre-production  runs of devices for customer approval,  to conduct
full  production   runs  of  low-volume   devices,   and  to  develop   advanced
manufacturing  processes  that  can  be  applied  in  Manila  during  full-scale
production.  In  addition,  the  facility  has  one of  the  largest  LCD  glass
production  capacities  in North America  which,  when fully  operational,  will
permit the Company to reduce its dependence on foreign  suppliers for LCD glass.
Facility  personnel  includes  a team  of  experts  ranging  from  LCD  research
scientists to specialized engineers with backgrounds in electronics,  mechanics,
chemistry, physics, and manufacturing. The Company maintains a complete array of
state-of-the-art testing and quality control equipment at the facility.

         The Company is a party to an agreement (the  "Sub-Assembly  Agreement")
with Technology Electronic Assembly and Management Pacific Corporation ("TEAM"),
pursuant to which TEAM manufactures, assembles, and tests user interface devices
for the Company at a facility owned by TEAM located in Manila,  the Philippines.
TEAM manufactures, assembles, and tests devices designed by the Company pursuant
to  procedures  set  forth in the  Sub-Assembly  Agreement  in  accordance  with
specifications  supplied by the  Company.  The Company  owns the  manufacturing,
assembling,  and testing equipment (including automated die attach and wire bond
equipment with automatic pattern recognition features for die and wire placement
for LED  die) as well as the  processes  and  documentation  used by TEAM at the
Manila  facilities.  See  "Description of Property"  contained in Item 2 of this
Report. Pursuant to the Sub-Assembly Agreement,  the Company supplies all direct
materials  to TEAM  that are  necessary  to meet  forecasted  production  levels
specified by the  Company.  The Company  pays TEAM for the  sub-assembly  of the
Company's  devices based upon a negotiated hourly rate. The Company also employs
professional  personnel,  including an Operations Manager,  with a support staff
consisting  of  manufacturing,  quality,  and process  engineers,  and logistics
personnel at the Manila facility.

         The Sub-Assembly  Agreement between the Company and TEAM was renewed on
February  22, 1995 and extends  through  December 31, 1999 and from year to year
thereafter.  The Sub-Assembly Agreement requires minimum production levels to be
maintained.  The termination of the  Sub-Assembly  Agreement or the inability of
TEAM to fulfill its requirements under the Sub-Assembly  Agreement would require
the Company to acquire  additional  manufacturing  facilities or to contract for
additional  manufacturing services. The Philippines has been subject to volcanic
eruptions,  typhoons,  and substantial civil  disturbances,  including attempted
military  coups against the  government.  These  circumstances  could affect the
Company's ability to obtain products pursuant to the Sub-

                                        4
<PAGE>

Assembly  Agreement,  although there has not been any material  interruption  of
operations to date. The termination of or the inability of the Company to obtain
products  pursuant to the  Sub-Assembly  Agreement,  even for a relatively short
period, would have a material adverse effect on the operations and profitability
of the Company.  See "Special  Considerations - Manufacturing  Operations in the
Philippines" contained in Item 1 of this Report.

         The Company has implemented an aggressive quality control program.  The
program is based upon  Statistical  Process Control,  which advocates  continual
quantitative measurements of crucial parameters and uses those measurements in a
closed-loop feedback system to control the manufacturing  process.  Product life
testing is performed to help ensure long-term product  reliability.  The results
of life tests are analyzed and actions taken to refine the manufacturing process
or enhance the product design.

         The Company engages in a continuing  equipment  acquisition  program at
both the Arizona and Philippine  manufacturing  locations.  In 1995, the Company
placed in service  approximately  $13.6  million of  manufacturing  equipment in
Arizona and approximately $4.9 million in the Philippines.

Sales and Marketing

         The Company  markets its services  primarily in North America,  Europe,
and Asia through  direct  technical  sales persons and, to a much lesser extent,
through an independent sales and distribution network. This network includes two
franchised  distributors in approximately 71 sales offices. A staff of in-house,
Arizona-based  sales and  marketing  personnel  directs and aids the  franchised
distributors.  The  Company  also has  sales  engineers  in  Arlington  Heights,
Illinois, Southfield, Michigan, and Norcross, Georgia.

         The Company's sales to customers in Europe represented approximately 73
percent of net sales in 1995. The Company distributes products in Europe through
a  network  of   distributors,   augmented   in  some   regions   by   marketing
representatives.  This network  receives  support from the  marketing,  customer
service,  and support  staff  employed by the Company's  subsidiary,  Three-Five
Systems Limited, located in Swindon,  England. The European staff and network of
distributors  provide  marketing,  consulting,  and product  design  locally for
customers throughout Western Europe.

Customers

         The Company's strategy involves  concentrating its efforts on providing
design and  production  services to leading  companies in a limited  number of a
fast growing industries.  As a result, the Company generally derives its revenue
from services  provided to a limited number of customers.  The Company's largest
customer is  Motorola,  Inc.  ("Motorola").  Sales to Motorola  are made through
eleven  buyers  operating  in  five  separate  product  divisions.  The  Company
currently  designs and manufactures user interface devices used in approximately
40 individual  product  programs for Motorola.  During 1995, the five largest of
these  programs  accounted  for 19.4  percent,  9.3 percent,  8.4  percent,  5.2
percent, and 4.7 percent,  respectively, of the Company's total revenue, and the
remaining  product programs in the aggregate  accounted for  approximately  33.5
percent  of the  Company's  total  revenue.  Devices  that are used in  cellular
telephones accounted for substantially all of the Company's sales to Motorola in
1995. See "Special  Considerations  -Substantial  Reliance on Certain Customers"
contained in Item I of this Report.

Backlog

         As of  December  31,  1995,  the  Company  had a  backlog  of orders of
approximately $21.3 million, all of which orders are believed to be firm and all
of which are expected to be filled during fiscal 1996.  The backlog of orders at
December 31, 1994 was approximately  $20.5 million.  The Company's  business has
not been seasonal to date.

                                        5
<PAGE>

Patents and Trademarks

         The  Company's   business  does  not  depend  on  patent  or  trademark
protection.

Raw Materials

         The principal raw  materials  used in producing the Company's  displays
consist of gallium arsenide and gallium  phosphorous  wafers and die, LCD glass,
driver die, circuit boards,  molded plastic parts, lead frames, wire, chips, and
packaging materials.  The Company believes that there are alternative sources of
supplies for most of these materials.  Many of such materials,  however, must be
obtained from foreign suppliers which subjects the Company to the risks inherent
in obtaining materials from foreign sources,  including supply interruptions and
currency  fluctuations.  The  Company's  suppliers  are  adequately  meeting the
requirements  of the Company.  The  Company's  ability to produce a  significant
percentage of its  requirements  of LCD glass in its new facility is expected to
reduce  the   Company's   dependence   on  foreign   suppliers.   See   "Special
Considerations - Shortage of Raw Materials and Supplies"  contained in Item 1 of
this Report.

Competition

         The Company  believes that Optrex  America,  Inc.,  Seiko-Epson,  Vikay
Industrial Pte. Limited,  PCI Limited,  and Philips Components B.V. compete with
the  Company's  LCD devices.  Hewlett-Packard,  Rohm Co.,  Ltd.,  LiteOn,  Inc.,
Stanley Electric Company,  Ltd., and Quality  Technologies Corp.  constitute its
principal  competitors for its LED devices.  Most of these competitors are large
companies that have greater financial, technical, marketing,  manufacturing, and
personnel resources than the Company. The revenue, profitability, and success of
the  Company  depend  substantially  upon its  ability  to  compete  with  other
providers of user interface devices.  No assurance can be given that the Company
will continue to be able to successfully compete with such organizations.

         The  Company  currently  competes  principally  on  the  basis  of  the
technical  innovation and performance of its product solutions,  including their
ease of use and  reliability,  as well as on  their  cost,  timely  design,  and
manufacturing and delivery schedules.  The Company's  competitive position could
be adversely  affected if one or more of its customers,  particularly  Motorola,
determine to design and manufacture their user interface  devices  internally or
secure them from other  parties.  See  "Special  Considerations  -  Competition"
contained in Item 1 of this Report.

Research and Development

         The Company conducts an active and ongoing research,  development,  and
engineering program that focuses on developing improved design and manufacturing
processes,  automating and perfecting design and manufacturing  techniques,  and
improving the overall  quality of services that the Company  provides.  Research
and  development  concentrates  on  LCD  process  development,   qualifying  new
materials  for  high  volume  LCD  manufacturing,  testing  new  liquid  crystal
mixtures,  and  quick-turn  prototyping.  Additionally,  the Company  focuses on
developing  advanced   manufacturing   processes  that  can  be  applied  during
full-scale production.

Environmental Regulation

         The  operations of the Company  result in the creation of small amounts
of hazardous waste,  including various epoxies,  gases, inks, solvents and other
wastes.  The amount of hazardous  waste  produced by the Company may increase in
the future  depending on changes in the  Company's  operations.  The disposal of
hazardous waste has received  increasing focus from federal,  state,  local, and
international  governments  and  agencies  and has been  subject  to  increasing
regulation. See "Special Considerations - Environmental Regulation" contained in
Item 1 of this Report.

                                        6
<PAGE>

         On  January  24,  1991,  the  Company  received  a notice of  potential
liability  at  the  Barkhamsted-New   Hartford  Landfill  Site  in  Barkhamsted,
Connecticut  from the United States  Environmental  Protection  Agency  ("EPA").
Fifty- seven other entities received similar letters. The letter states that the
EPA has documented releases of hazardous substances from the site and has listed
it on the National Priorities List. The letter also indicates that EPA has spent
and is considering  spending  public funds on actions to investigate and control
such  releases  or  threatened  releases  at the site.  Unless  EPA  reaches  an
agreement  under which a responsible  party or parties will properly  perform or
finance such actions,  EPA will itself perform these actions pursuant to Section
104 of the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") and seek  reimbursement  from the  responsible  party or parties.  On
January 9, 1992, the Company received an additional  104(e)  questionnaire  from
the EPA  which  was  completed  and  submitted  during  1992.  To the  Company's
knowledge, no complaint has been filed. No further administrative action against
the Company has been taken.

         Some of the 57 other  entities  notified by the EPA have formed a group
to  respond  to the EPA  letter,  and  so-called  special  notice  letters  were
subsequently  sent  to them  but  not the  Company.  The  Company  currently  is
evaluating its potential liability at the site and whether to participate in any
such activities.

         In a separate  matter,  the  Company  conducted  a clean-up  of limited
chemical   contamination   at  its  former  property   located  in  Barkhamsted,
Connecticut. The contamination was caused by the previous owner of the property,
and  not as a  result  of  any of the  Company's  operations.  The  Company  has
contracted  with an  environmental  consulting  firm  for  assistance  with  the
clean-up process and has complied with the requests and  recommendations  of the
Connecticut  Environmental Protection Agency throughout the process. The Company
believes that the source of the contamination has been removed from the property
and that the clean-up is  substantially  complete as of the date of this Report.
Four monitoring wells have been installed to permit periodic  chemical  analysis
to be made at the property.  The property was sold on June 25, 1995,  subject to
the Company  making its best  efforts to obtain from either the  Connecticut  or
federal  Environmental  Protection  Agency  documentation to the effect that the
property is clean and that there is no actionable  contamination in the vicinity
of the property.

Employees

         As of December 31, 1995,  the Company  employed a total of 174 persons.
This number includes 127 full-time and  approximately 30 temporary  employees at
its  principal  U.S.  facility  in Tempe,  Arizona.  The Company  considers  its
relationship with its employees to be good, and none of its employees  currently
are represented by a union in collective bargaining with the Company.

         TEAM  provides the  personnel  engaged in the assembly of the Company's
devices in Manila pursuant to the Sub-Assembly Agreement between the Company and
TEAM. See "Description of Business - Manufacturing Facilities" contained in Item
1 of this Report. As of December 31, 1995, approximately 1,700 persons performed
direct  and  indirect  labor  operations  at the  Manila  facility  through  the
Sub-Assembly Agreement with TEAM.

                                        7
<PAGE>

Executive Officers

         The  following  table sets  forth  information  concerning  each of the
executive officers of the Company:

         Name          Age                        Position
         ----          ---                        --------
David R. Buchanan      63    Chairman of the Board, President, and 
                               Chief Executive Officer
David M. Rzasa         44    Executive Vice President and Chief 
                               Operating Officer
Randal L. Buness       39    Vice President-Finance and Administration, 
                               Chief Financial Officer, Secretary, and Treasurer
Dan J. Schott          56    Vice President-Technology
James F. Bowser        54    Vice President-Sales and Marketing
Vincent C. Hren        45    Vice President-Manufacturing Operations

         David R.  Buchanan  has been  Chairman of the Board,  President,  Chief
Executive Officer, and a Director of the Company since its formation in February
1990.  Mr.  Buchanan  served as  Treasurer  of the  Company  from May 1990 until
January  1994  and as  Chairman  of  the  Board  and  Chief  Executive  Officer,
President, and a Director of one of the predecessors of the Company from October
1986,  February 1987, and November 1985,  respectively,  until the predecessor's
merger into the Company in May 1990.

         David M. Rzasa has been Executive  Vice  President and Chief  Operating
Officer of the Company since  September  1995.  From 1991 to September 1995, Mr.
Rzasa served as President,  Executive  Vice  President,  and General  Manager of
Rosemount  Analytical,  Inc.  ("Rosemount"),  a division  of Emerson  Electric's
Fisher-Rosemount  instrumentation  group. Mr. Rzasa served as General Manager of
Rosemount's  European  operations  from  1987 to 1991  and  held  various  other
operations and engineering positions with Rosemount from 1979 to 1987.

         Randal L. Buness has been Vice  President-Finance  and  Administration,
Chief Financial Officer, Secretary, and Treasurer of the Company since September
1994. Mr. Buness served as Chief Financial Officer,  Secretary, and Treasurer of
United Medical Network from January 1993 until September 1994. From January 1989
until January  1993,  he worked as a  self-employed  financial  consultant.  Mr.
Buness served as principal and manager with Arthur Young from January 1986 until
January 1989 and served as a manager,  senior,  and staff  accountant with Price
Waterhouse  from July 1979 until January 1986. Mr. Buness is a Certified  Public
Accountant.

         Dan J. Schott has been Vice  President-Technology  of the Company since
January 1994.  From 1988 to January 1994,  Mr. Schott was an Associate  Director
with  Honeywell  Inc.,  where  his   responsibilities   included   research  and
development  and  program  management.  From 1981 until  1987,  he held  various
engineering positions with Sperry Rand Corp.

         James F.  Bowser has been Vice  President-Sales  and  Marketing  of the
Company since January  1996.  Mr. Bowser served as Vice  President-Manufacturing
Operations  of the Company from January 1994 until  January 1996, as Director of
Marketing  and New  Product  Development  of the  Company  from July 1992  until
January 1994, as Vice  President of Marketing and New Product  Development  from
January  1992  until  July  1992,  and as  Senior  Vice  President  of Sales and
Marketing  from August 1990 until January  1992.  From January 1985 until August
1990, he held a variety of executive  positions with National  Computer Systems,
Inc.

         Vincent C. Hren has been Vice President-Manufacturing Operations of the
Company  since  January  1996.  Mr.  Hren  served  as  Vice  President-Worldwide
Automotive  of  Graco  Inc.  from  1994  to  1995.   Mr.  Hren  served  as  Vice
President-Worldwide  Operations for Fisher-Rosemount  Systems, Inc. from 1993 to
1994, General Manager of Rosemount Analytical,  Inc. from 1992 to 1993, and held
various management positions with Fisher-Rosemount, Inc. from 1974 to 1992.

                                        8
<PAGE>
                             SPECIAL CONSIDERATIONS

Certain Factors Affecting Operating Results

         The  Company's  operating  results are  affected  by a wide  variety of
factors  which could  adversely  impact its net sales and  profitability.  These
factors,  many of which are  beyond  the  control of the  Company,  include  the
Company's ability to identify industries which have significant growth potential
and to establish strong and long- lasting  relationships with companies in those
industries; its ability to provide significant design and manufacturing services
for those  companies  on a timely  and  cost-effective  basis;  its  success  in
maintaining  customer  satisfaction  with the Company's design and manufacturing
services;  market acceptance of products of its customers  incorporating devices
designed and manufactured by the Company;  the level and timing of orders placed
by  customers  which the  Company  can  complete  in a quarter;  customer  order
patterns and seasonality;  changes in order mix; the performance and reliability
of devices  designed and  manufactured  by the  Company;  the life cycles of its
customers' products; the availability and utilization of manufacturing capacity;
fluctuations in manufacturing yield and productivity;  the availability and cost
of raw  materials,  equipment,  and  supplies;  the  timing of  expenditures  in
anticipation  of orders;  the cyclical  nature of the industries and the markets
served by the Company;  technological  changes;  and competition and competitive
pressures on prices.

         The Company's ability to increase its design and manufacturing capacity
to meet customer demand and maintain  satisfactory delivery schedules will be an
important factor in its long-term prospects. The Company's product solutions are
incorporated into a wide variety of communications,  consumer,  medical,  office
automation,  and  industrial  products.  A slowdown in demand for products which
utilize the Company's devices as a result of economic or other conditions in the
United  States or worldwide  markets  served by the Company or other broad based
factors would adversely affect the Company's operating results.

Dependence on New Products and Technologies

         The  Company  operates  in  fast  changing  industries.   Technological
advances,  the  introduction of new products,  and new design and  manufacturing
techniques could adversely affect the Company's operations unless the Company is
able to adapt to the resulting  changing  conditions.  As a result,  the Company
will  be  required  to  expend  substantial  funds  for and  commit  significant
resources to the conduct of continuing research and development activities,  the
engagement of additional engineering and other technical personnel, the purchase
of advanced design, production and test equipment, and the enhancement of design
and manufacturing processes and techniques.

         The  Company's  future  operating  results will depend to a significant
extent on its ability to continue to provide design and  manufacturing  services
for new products  that compare  favorably on the basis of time to  introduction,
cost, and performance with the design and manufacturing capabilities of OEMs and
other  third-party  suppliers.  The  success  of new  design  and  manufacturing
services  depends on  various  factors,  including  proper  customer  selection,
utilization of advances in technology,  innovative  development of new solutions
for customer products,  efficient and cost-effective services, timely completion
and delivery of new product  solutions,  and market acceptance of customers' end
products.  Because of the complexity of the Company's  design and  manufacturing
services,  the Company may experience delays from time to time in completing the
design and manufacture of new product  solutions.  In addition,  there can be no
assurance that any new product  solutions  will receive or maintain  customer or
market  acceptance.  If the  Company  were  unable  to  design  and  manufacture
solutions  for new  products  of its  customers  on a timely and  cost-effective
basis,  its  future  operating   results  would  be  adversely   affected.   See
"Description  of Business - Products and  Services"  contained in Item 1 of this
Report.

Substantial Reliance on Certain Customers

         The Company's strategy involves  concentrating its efforts on providing
design and production  services to leading companies in a limited number of very
fast growing industries. As a result, the Company generally derives
                                        9
<PAGE>
its  revenue  from  services  provided  to a limited  number of  customers.  The
Company's  largest  customer is  Motorola.  Sales to Motorola  are made  through
eleven  buyers  operating  in  five  separate  product  divisions.  The  Company
currently   designs  and  manufactures   user  interface   devices  for  use  in
approximately 40 individual product programs for Motorola. During 1995, the five
largest of these programs accounted for 19.4 percent,  9.3 percent, 8.4 percent,
5.2 percent, and 4.7 percent,  respectively, of the Company's total revenue, and
the remaining product programs in the aggregate accounted for approximately 33.5
percent  of the  Company's  total  revenue.  Devices  that are used in  cellular
telephones accounted for substantially all of the Company's sales to Motorola in
1995.
         Although the Company has  long-established  relationships  with many of
its  customers,  the Company does not have long-term  supply  contracts with any
customers.  Customers  also  generally  do not  commit to  long-term  production
schedules.  In addition,  customer orders  generally can be cancelled and volume
levels  changed or delayed.  The timely  replacement of cancelled,  delayed,  or
reduced  orders  cannot be  assured.  A  decrease  in  business  from any of the
Company's major customers,  particularly Motorola, would have a material adverse
effect on the Company's results of operations.

Manufacturing Operations in the Philippines

         The  Company  has  maintained  its  primary  manufacturing  facility in
Manila, the Philippines since 1986. TEAM, a third party subcontractor,  operates
the facility under a subcontract agreement with the Company utilizing equipment,
processes,  and documentation  owned and supervisory  personnel  employed by the
Company. The subcontractor owns the facility, which is located on land it leases
from  the  Philippine  government,   and  provides  production  personnel.   The
subcontractor  also utilizes the facility to produce products for other entities
unrelated  to the  Company.  The  subcontract  agreement,  which was  renewed on
February 22, 1995,  has a current term extending  through  December 31, 1999 and
from year to year thereafter.

         The Company has made cumulative capital  investments in the Philippines
amounting  to  approximately  $10.3  million  through  December  31,  1995.  The
Company's  reliance on  personnel  and  facilities  in the  Philippines  and its
maintenance  of  inventories  abroad expose the Company to certain  economic and
political  risks,   including  the  business  and  financial  condition  of  the
subcontractor,  political  instability  and  expropriation,  supply  disruption,
currency  controls,  and exchange  fluctuations  as well as changes in tax laws,
tariffs,  and freight rates.  The Company has not  experienced  any  significant
interruptions in its business  operations in the Philippines to date despite the
fact that the Philippines has been subject to volcanic eruptions,  typhoons, and
substantial civil  disturbances,  including attempted military coups against the
government. The Company has made advance payments to the subcontractor to assist
the  subcontractor  in meeting its working capital needs while it negotiates new
financing  arrangements.  Advances,  net of amounts  payable  to TEAM,  totalled
approximately  $500,000 at December 31, 1995 and are secured by future  payments
for  subcontracting  services  to be  provided  to the  Company as well as other
assets  of the  subcontractor.  The  Company  believes  that  its  manufacturing
operations in the  Philippines  constitute  one of the Company's  most important
resources  and  that it would  be  difficult  for it to  replace  the  low-cost,
high-performance  facility or the high-quality and hardworking  production staff
if its manufacturing operations in the Philippines were disrupted or terminated.
As a result, the Company's  operations would be adversely affected if operations
in the Philippines or air transportation  with the Philippines were disrupted or
terminated,  even for a relatively  short period of time.  See  "Description  of
Business -Manufacturing Facilities" contained in Item I of this Report.

International Trade and Currency Exchange

         Approximately  73  percent of the  Company's  net sales in 1995 were to
international  customers.  In  addition,  the Company  purchases  a  substantial
portion of its raw  materials and  equipment  from foreign  suppliers and incurs
labor costs in foreign locations.  The foreign sale of products and the purchase
of raw materials and equipment from foreign suppliers may be adversely  affected
by political and economic conditions abroad.  Protectionist trade legislation in
either the United States or foreign  countries,  such as a change in the current
tariff  structures,  export  compliance  laws,  or other trade  policies,  could
adversely  affect the Company's  ability to sell devices in foreign  markets and
purchase materials or equipment from foreign suppliers.

                                       10
<PAGE>

         A small portion of the Company's  foreign  transactions are denominated
in currencies other than the U.S. dollar.  Such transactions  expose the Company
to  exchange  rate  fluctuations  for the period of time from  inception  of the
transaction  until it is settled.  Although  the Company  has not  incurred  any
material  exchange  gains or losses  to date,  there  can be no  assurance  that
fluctuations  in the  currency  exchange  rates in the  future  will not have an
adverse  effect on the  Company's  operations.  The Company has entered and from
time to time will enter  into  hedging  transactions  in order to  minimize  its
exposure to currency rate fluctuations.

Manufacturing Yields and Capacity

         The design and manufacture of user interface devices are highly complex
processes  that are sensitive to a wide variety of factors,  including the level
of contaminants in the  manufacturing  environment,  impurities in the materials
used, and the performance of the design and production  personnel and equipment.
As is typical in the  industry,  the Company  from time to time has  experienced
lower  than  anticipated   manufacturing  yields  and  lengthening  of  delivery
schedules.  During the past three fiscal  years,  the Company has  increased its
manufacturing  productivity,  achieved higher manufacturing  yields, and reduced
design and manufacturing  errors, all of which have been positive factors in its
operating results. In addition,  the Company has instituted procedures to assure
its  ability to meet  delivery  schedules  to satisfy  increased  business.  The
Company's  operating  results  would be adversely  affected if it were unable to
maintain  high  levels of  productivity  or to  maintain  satisfactory  delivery
schedules.

         Manufacturing yields and delivery schedules also may be affected as the
Company expands its Manila  manufacturing  capacity.  Operating results could be
adversely affected if the expansion of the Company's  manufacturing  capacity is
delayed or  inefficiently  implemented.  Other  companies in the  industry  have
experienced difficulty in expanding manufacturing capacity, with such difficulty
resulting in reduced yields or delays in product deliveries. No assurance can be
given that the  Company  will not  experience  manufacturing  yield or  delivery
problems in the future.  Such  problems  could  materially  affect the Company's
operating  results.  See  "Description of Business -  Manufacturing  Facilities"
contained in Item 1 of this Report.

Utilization of New Facility

         The Company made substantial expenditures in constructing and equipping
its new facility in Tempe, Arizona during 1995. The Company intends to utilize a
significant  portion of the facility to produce a substantial portion of its own
requirements  for LCD glass.  The  successful  utilization  of the facility will
require  the  Company  (i) to produce  LCD glass on a timely and  cost-effective
basis  at  quality  levels  at  least  equal  to the LCD  glass  available  from
independent  suppliers  and (ii) to utilize the LCD glass it produces in devices
it designs  and  manufactures  in a manner  satisfactory  to its  customers.  No
assurance can be given that the Company will not  experience  problems or delays
in implementing or conducting its LCD glass manufacturing  operations.  Any such
problems could result in the  lengthening of the Company's  delivery  schedules,
reductions  in  the  quality  or  performance   of  the  Company's   design  and
manufacturing  services, and reduced customer  satisfaction.  Such problems also
could  require  the Company to purchase  its LCD glass  requirements  from third
parties and result in the inability of the Company to recover its  investment in
the facility.

Management of Growth

         The Company  currently is experiencing a period of significant  growth.
The  Company's  ability  to manage  its growth  effectively  will  require it to
enhance  its  operational,  financial,  and  management  systems,  to expand its
facilities  and  equipment,  and  to  successfully  hire,  train,  and  motivate
additional employees, including the technical personnel necessary to operate its
new LCD glass  production  facility  in  Arizona.  The failure of the Company to
manage its growth on an effective basis could have a material  adverse effect on
the Company's operations.

         The Company may be required to increase  staffing and other expenses as
well as its  expenditures  on capital  equipment and leasehold  improvements  in
order to meet the  anticipated  demand  of its  customers.  Customers,  however,
generally do not commit to firm production  schedules for more than a short time
in advance. The

                                       11
<PAGE>
Company's profitability would be adversely affected if the Company increases its
expenditures in anticipation of future orders that do not materialize. Customers
also may require rapid  increases in design and production  services which place
an excessive short-term burden on the Company's resources.

Dependence on Key Personnel

         The Company's  development  and  operations to date have been,  and its
proposed  operations  will  be,  substantially  dependent  on  the  efforts  and
abilities of its senior  management and technical  personnel  including David R.
Buchanan,  who  serves  as the  Chairman  of the  Board,  President,  and  Chief
Executive Officer of the Company.  The competition for qualified  management and
technical  personnel is intense.  The loss of services of one or more of its key
employees or the inability to add key personnel  (including  those  required for
its new LCD glass  production  facility) could have a material adverse effect on
the Company.  See  "Description of Business - Executive  Officers"  contained in
Item 1 of this Report.  The Company does not have an employment  agreement with,
or key person life  insurance  covering  any officer or  employee.  The Company,
however,  maintains  noncompetition  and  nondisclosure  agreements with its key
personnel.

Possible Volatility of Stock Price

         The market price of the Company's  Common Stock increased  dramatically
during the three-year period ended December 31, 1994, but declined significantly
during  1995.  See "Price  Range of Common  Stock"  contained  in Item 5 of this
Report.  The trading  price of the  Company's  Common  Stock in the future could
continue to be subject to wide  fluctuations  in  response  to various  factors,
including  quarterly  variations in operating results of the Company,  actual or
anticipated  announcements of technical  innovations or new product developments
by the  Company  or its  competitors,  changes  in  analysts'  estimates  of the
Company's financial performance, general conditions in the electronics industry,
worldwide  economic and financial  conditions,  and other events or factors.  In
addition, the stock market has experienced extreme price and volume fluctuations
which have  particularly  affected  the market  prices for many high  technology
companies and which often have been  unrelated to the operating  performance  of
such companies.  These broad market fluctuations and other factors may adversely
affect the market price of the Company's Common Stock.

Competition

         The industries  which the Company serves are intensely  competitive and
have been  characterized  by price  erosion,  rapid  technological  change,  and
foreign competition.  The Company competes with major domestic and international
companies,  many of which have  greater  market  recognition  and  substantially
greater financial, technical, marketing,  distribution, and other resources than
the Company possesses.  Emerging companies also may increase their participation
in the user  interface  device  market.  The  ability of the  Company to compete
successfully depends on a number of factors both within and outside its control,
including the quality, performance, reliability, features, ease of use, pricing,
and diversity of its product  solutions;  the quality of its customer  services;
its ability to address the needs of its customers;  its success in designing and
manufacturing   new  product   solutions,   including  those   implementing  new
technologies;  the  availability of adequate  sources of raw materials and other
supplies at acceptable prices;  its efficiency of production;  the rate at which
customers  incorporate  the  Company's  user  interface  devices  into their own
products;  product  solution  introductions  by the Company's  competitors;  the
number,  nature,  and success of its competitors in a given market;  and general
market and economic  conditions.  The Company currently competes  principally on
the basis of the technical  innovation  and  performance  of its user  interface
devices,  including  their ease of use and  reliability,  as well as on cost and
timely design, manufacturing,  and delivery schedules. The Company's competitive
position could be adversely  affected if one or more of these customers increase
their own capacity and decide to design and manufacture their own user interface
devices, to use standard devices, or to outsource with a competitor. There is no
assurance that the Company will continue to be able to compete  successfully  in
the future.  See "Description of Business - Competition"  contained in Item 1 of
this Report.
                                       12
<PAGE>
Shortage of Raw Materials and Supplies

         The  principal raw  materials  used in producing the Company's  product
solutions  consist of gallium arsenide and gallium  phosphorous  wafers and die,
LCD glass, driver die, circuit boards,  molded plastic parts, lead frames, wire,
chips, and packaging  materials,  most of which are acquired from Asian sources.
The Company does not have long-term contracts with its suppliers.

         The Company believes that there are alternative sources of supplies for
most of these materials. Many of such materials,  however, must be obtained from
foreign suppliers, which subjects the Company to certain risks, including supply
interruptions  and currency price  fluctuations.  Purchasers of these materials,
including the Company, experience difficulty from time to time in obtaining such
materials.   The  Company's  suppliers  currently  are  adequately  meeting  the
requirements of the Company,  and the Company's ability to produce a substantial
portion of its own requirements for LCD glass in its new facility is expected to
reduce the Company's dependence on foreign suppliers of LCD glass.

The Electronics Industry: Cyclicity and Capital Requirements

         The electronics industry has experienced significant economic downturns
at various  times,  characterized  by  diminished  product  demand,  accelerated
erosion of average selling prices,  and production  over-capacity.  In addition,
the electronics  industry has been  characterized by cyclicity.  The Company has
sought to reduce its exposure to industry  downturns  and cyclicity by providing
design and  production  services  for  leading  companies  in rapidly  expanding
segments of the  electronics  industry.  However,  the  Company  may  experience
substantial period-to-period fluctuations in future operating results because of
general industry conditions or events occurring in the general economy. There is
no assurance that the Company will continue to experience increased demand.

         To remain  competitive,  the Company must continue to make  significant
investments in research and development,  equipment, and facilities. As a result
of the increase in fixed costs and operating  expenses  related to these capital
expenditures,  the Company's  operating results may be adversely affected if its
net sales do not  increase  sufficiently  to offset  the  increased  costs.  The
Company  from  time to time may seek  additional  equity  or debt  financing  to
provide  for the  capital  expenditures  required  to  maintain  or  expand  the
Company's design and production facilities and equipment.  The timing and amount
of any such capital  requirements cannot be predicted at this time. There can be
no assurance that any such financing will be available on acceptable  terms.  If
such financing is not available on satisfactory terms, the Company may be unable
to expand its  business or develop  new  customers  at the rate  desired and its
operating results may be adversely  affected.  Debt financing increases expenses
and must be repaid  regardless  of operating  results.  Equity  financing  could
result in  additional  dilution  to  existing  stockholders.  See  "Management's
Discussion and Analysis - Liquidity and Capital  Resources"  contained in Item 6
of this Report.

Environmental Regulation

         The  operations of the Company  result in the creation of small amounts
of hazardous waste, including various epoxies,  gases, inks, solvents, and other
wastes.  The  Company,  therefore,  is  subject  to  federal,  state,  and local
governmental regulations related to the use, storage, discharge, and disposal of
toxic,  volatile,  or  otherwise  hazardous  chemicals  used in its  design  and
manufacturing  processes.  The amount of hazardous waste produced by the Company
may increase in the future depending on changes in the Company's operations. The
failure  by  the  Company  to  comply  with  present  or  future   environmental
regulations  could result in fines being  imposed on the Company,  suspension of
production, or a cessation of operations. Compliance with such regulations could
require the Company to acquire  costly  equipment or to incur other  significant
expenses.  Any  failure  by the  Company to  control  the use of, or  adequately
restrict the  discharge  of,  hazardous  substances  could  subject it to future
liabilities.

         In January 1991, the Company  received a notice of potential  liability
respecting a landfill site near the Company's  former  property in  Barkhamsted,
Connecticut from the United States Environmental Protection Agency.
                                       13
<PAGE>

In a separate  matter,  the  Company  expended a total of  approximately  $9,500
during  1993,  1994 and 1995 to remove  contamination  at the  Company's  former
Connecticut  property.  There  can  be no  assurance  that  other  environmental
problems will not be discovered in the future which could subject the Company to
future  costs or  liabilities.  See  "Description  of  Business -  Environmental
Regulation" contained in Item 1 of this Report.

Change in Control Provisions

         The Company's  Restated  Certificate  of  Incorporation  (the "Restated
Certificate")  and the Delaware  General  Corporation  Law (the "Delaware  GCL")
contain provisions that may have the effect of making more difficult or delaying
attempts by others to obtain  control of the Company,  even when these  attempts
may be in the best  interests of  stockholders.  The Restated  Certificate  also
authorizes the Board of Directors, without stockholder approval, to issue one or
more series of  Preferred  Stock which could have voting and  conversion  rights
that adversely affect or dilute the voting power of the holders of Common Stock.
The  Delaware  GCL also  imposes  conditions  on  certain  business  combination
transactions with "interested stockholders" (as defined therein).

Rights to Acquire Shares

         At December  31,  1995,  a total of 6,500  shares of Common  Stock were
reserved for issuance  upon  exercise of options  previously  granted  under the
Company's  1994 Automatic  Stock Option Plan for  Non-employee  Directors,  at a
weighted  average  exercise price of $27.89 per share.  In addition,  a total of
220,500  shares of Common  Stock were  reserved for  issuance  upon  exercise of
options  previously  granted  under the  Company's  1993 Stock Option Plan, at a
weighted  average  exercise  price of $17.61 per  share,  and a total of 312,576
shares of Common  Stock were  reserved  for  issuance  upon  exercise of options
previously  granted  under the  Company's  1990 Stock  Option Plan at a weighted
average exercise price of $.92 per share. During the terms of such options,  the
holders  thereof  will have an  opportunity  to profit  from an  increase in the
market price of Common Stock with resulting dilution in the interests of holders
of Common Stock.  The  existence of such stock options may adversely  affect the
terms on which the Company can obtain additional  financing,  and the holders of
such  options  can be  expected  to  exercise  such  options  at a time when the
Company,  in all  likelihood,  would be able to  obtain  additional  capital  by
offering  shares of its Common Stock on terms more favorable to the Company than
those provided by the exercise of such options.

Shares Eligible for Future Sale

         Sales of substantial  amounts of "restricted  securities" (as that term
is used in Rule 144 under the  Securities Act of 1933, as amended) in the public
market could adversely affect  prevailing market prices. Of the 7,735,745 shares
of Common Stock outstanding on December 31, 1995, approximately 7,712,615 shares
were  eligible  for  resale  in  the  public  market  without  restriction,  and
approximately an additional 23,130 shares were "restricted  securities" and were
eligible for resale in the public  market  subject to  compliance  with Rule 144
under the Securities Act of 1933, as amended.

Dividends

         The Company has never paid any cash  dividends  on its Common Stock and
does not anticipate  that it will pay cash dividends in the near term.  Instead,
the Company  intends to apply any earnings to the expansion and  development  of
its  business.  See "Price  Range of Common  Stock"  contained in Item 5 of this
Report.

                                       14
<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTY

         During  1995,  the  Company  completed  the  construction  of  its  new
principal  facility  to  house  its  U.S.-based  manufacturing  operations;  its
research, development,  engineering, design, and corporate functions; and one of
the largest LCD glass  manufacturing  operations in North America.  The facility
contains  97,000  square feet of space  located on a 5.7 acre site in the Papago
Park Center in Tempe,  Arizona.  The Company entered into a ground lease through
December  31,  2069,  subject to renewal and  purchase  options as well as early
termination provisions. Costs to construct,  furnish, and equip the new facility
were approximately  $24.0 million,  of which payments of $22.2 million were made
during 1995.

         The Company leases  approximately  3,500 square feet of office space in
Swindon,  United  Kingdom,  where it maintains its European  administrative  and
executive offices.

         The Company leases  approximately  60,000 square feet of  manufacturing
space in Manila, the Philippines. Approximately 40,000 square feet is subject to
a lease which expires on December 31, 1999 and the remaining  20,000 square feet
is subject to a lease which expires on March 1, 1997,  with renewal  options for
two additional years.

ITEM 3.   LEGAL PROCEEDINGS

         There are no legal  proceedings  to which the  Company is a party or to
which any of its properties are subject,  other than routine litigation incident
to the Company's business which is covered by insurance or an indemnity or which
are not  expected  to have a  material  adverse  effect  on the  Company.  It is
possible,  however,  that the  Company  could  incur  claims for which it is not
insured or that exceed the amount of its insurance coverage.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Not applicable

                                       15
<PAGE>
                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Price Range of Common Stock

         The  Company's  Common  Stock  has been  listed  on the New York  Stock
Exchange  ("NYSE") under the symbol "TFS" since December 29, 1994. The Company's
Common Stock was listed on the American Stock Exchange ("AMEX") from January 28,
1993 through  December 28, 1994.  The  Company's  Common Stock was listed on the
AMEX Emerging  Company  Marketplace  from March 18, 1992 until January 27, 1993,
and on the Nasdaq National Market system from May 1, 1990 until March 17, 1992.

         The following table sets forth the quarterly high and low prices of the
Company's  Common  Stock for the  periods  indicated,  adjusted  to reflect  the
two-for-one split of the Common Stock effected as a stock dividend in May 1994.

                                                        High              Low
                                                        ----              ---
1993:
First Quarter........................................  $  3 7/8       $  1 3/4
Second Quarter.......................................     8              3 7/16
Third Quarter........................................     12 1/16        6 3/8
Fourth Quarter.......................................     17 5/8         10 7/8

1994:
First Quarter........................................  $  30 7/8      $  16 9/16
Second Quarter.......................................     29 15/16       20
Third Quarter........................................     46 1/2         26 1/4
Fourth Quarter.......................................     50             28 3/4

1995:
First Quarter........................................  $  38 3/8      $  20 5/8
Second Quarter.......................................     38 7/8         22 3/8
Third Quarter........................................     36 3/4         24 1/4
Fourth Quarter.......................................     26 1/2         16

         As of December  31, 1995,  there were  approximately  1,309  holders of
record of the Company's Common Stock.

         The  present  policy of the  Company is to retain  earnings  to provide
funds for the operation and expansion of its business.  The Company has not paid
dividends on its Common Stock and does not anticipate  that it will do so in the
near term. Furthermore,  the Company's line of credit with First Interstate Bank
of Arizona,  N.A. ("First  Interstate") does not permit the payment of dividends
without the consent of First Interstate.  The payment of dividends in the future
will depend on the Company's growth,  profitability,  financial  condition,  and
other factors which the directors may deem relevant.

                                       16
<PAGE>
ITEM  6.  SELECTED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION AND ANALYSIS

         The following table summarizes certain selected consolidated  financial
data of the  Company  and is  qualified  in its  entirety  by the more  detailed
consolidated  financial statements and notes thereto appearing elsewhere herein.
The data have been derived from the  consolidated  financial  statements  of the
Company  audited by Arthur Andersen LLP,  independent  public  accountants.  All
share amounts and per share data have been  adjusted to reflect the  two-for-one
split of the Company's Common Stock effected as a stock dividend in May 1994.
<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                               --------------------------------------------------------

                                                1995        1994       1993(1)       1992        1991
                                                ----        ----       -------       ----        ----
                                                        (in thousands, except per share amounts)
Consolidated Statements of Income:
<S>                                            <C>         <C>         <C>          <C>         <C>    
Net Sales                                      $91,585     $85,477     $38,002      $20,833     $18,699
                                               -------     -------     -------      -------     -------
Costs and expenses:
  Cost of sales                                 70,481      59,409      26,725       15,388      14,698
  Selling, general and administrative            5,386       4,867       3,853        3,469       3,198
  Research and development                       2,396       1,270         857          468         164
                                                 -----       -----         ---          ---         ---
                                                78,263      65,546      31,435       19,325      18,060
                                                ------      ------      ------       ------      ------

Operating income                                13,322      19,931       6,567        1,508         639
                                                ------      ------       -----        -----         ---
Other income (expense)
  Interest income (expense), net                   765         859        (117)        (179)       (187)
  Other, net                                      (122)       (135)       (277)        (160)       (200)
                                                  ----        ----        ----         ----        ---- 
                                                   643         724        (394)        (339)       (387)
                                                   ---         ---        ----         ----        ---- 
Income before provision for income taxes
  and cumulative effect of accounting change    13,965      20,655       6,173        1,169         252
Provision for income taxes                       5,548       8,109       2,043          147          18
                                                 -----       -----       -----          ---          --

Income before cumulative effect of
  accounting change                              8,417      12,546       4,130        1,022         234
Cumulative effect of accounting change              --          --         924           --          --
                                                 -----      ------       -----        -----        ----        

Net income                                      $8,417     $12,546      $5,054       $1,022        $234
                                                ======     =======      ======       ======        ====
Earnings per common share and common
  share equivalent:
  Income before cumulative effect of
    accounting change                            $1.04       $1.59       $0.59        $0.14       $0.03
  Cumulative effect of accounting change            --          --        0.13           --          --
                                                  ----        ----        ----         ----        ----
Net income                                       $1.04       $1.59       $0.72        $0.14       $0.03
                                                 =====       =====       =====        =====       =====

Weighted average number of common
  shares and common share equivalents
  outstanding                                    8,084       7,882       7,040        7,225       7,705

Consolidated Balance Sheet Data 
(at end of period):

Working capital                                $22,400     $37,638      $7,427       $4,450      $2,766
Total assets                                    63,780      56,280      17,470        9,811       8,413
Notes payable to banks and long-term debt        3,000         182         223        2,184       1,953
Stockholders' equity                            55,224      46,561      10,202        4,661       4,112
</TABLE>
-----------------
(1)      The Company  adopted  Statement of Financial  Accounting  Standards No.
         109,  "Accounting  for Income  Taxes,"  effective  January 1, 1993. The
         presentation  above  includes  the  cumulative  effect of the change in
         accounting  principle  which  increased net income by $924,000 or $0.13
         per share, for the year ended December 31, 1993.

                                       17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS

General

         The  Company  derives  its net sales  primarily  from sales to original
equipment  manufacturers  ("OEMs"). The Company recognizes revenue upon shipment
to its  customers.  Operating  results  are  affected  by a number  of  factors,
including raw material costs,  operating  efficiencies,  and price  competition.
Share amounts and per share data reflect the two-for-one  split of the Company's
Common Stock effected as a stock dividend in May 1994.

Results of Operations

         The  following  table  sets  forth,  for  the  periods  indicated,  the
percentage  of  net  sales  of  certain  items  in  the  Consolidated  Financial
Statements of the Company.  The table and the discussion below should be read in
conjunction with the Consolidated Financial Statements and Notes thereto.

                                                      Year Ended December 31,
                                                    ----------------------------
                                                    1995        1994      1993
                                                    ----        ----      ----

Net sales                                          100.0%      100.0%     100.0%
Costs and expenses:
  Cost of sales                                     77.0        69.5       70.3
  Selling, general and administrative                5.9         5.7       10.1
  Research and development                           2.6         1.5        2.3
                                                     ---         ---        ---
                                                    85.5        76.7       82.7
                                                    ----        ----       ----

Operating Income                                    14.5        23.3       17.3
                                                    ----        ----       ----
Other income (expense):
  Interest income (expense), net                     0.8         1.0       (0.3)
  Other, net                                        (0.1)       (0.1)      (0.8)
                                                    ----        ----       ---- 

                                                     0.7         0.9       (1.1)
                                                     ---         ---       ---- 
Income before provision for income taxes and
  cumulative effect of accounting change            15.2        24.2       16.2
Provision for income taxes                           6.1         9.5        5.3
                                                     ---         ---        ---
Income before cumulative effect of
  accounting change                                  9.1        14.7       10.9
Cumulative effect of accounting change                --          --        2.4
                                                     ---        ----        ---

Net income                                           9.1%       14.7%      13.3%
                                                     ===        ====       ==== 

Year Ended December 31, 1995 Compared with Year Ended December 31,1994

         Net sales were $91.6  million  during 1995,  an increase of 7.1 percent
compared with net sales of $85.5  million  during 1994.  The sales  increase was
primarily a result of higher  order rates from a major  wireless  communications
customer for existing as well as new product programs.  The rate of sales growth
decreased  significantly in 1995, as compared to 1994,  primarily as a result of
the Company's  inability to bring two new major programs into production  during
the  period as well as the loss of sales  from other  older  programs  that were
being phased out of production.  Unit volumes of the Company's  highest  volume,
longest  running  cellular  telephone  program  are  expected  to decrease at an
accelerated pace during 1996 due to a product changeover being effected

                                       18
<PAGE>

by the Company's major customer. Newer replacement programs in both the cellular
and non-cellular  industries are not expected to produce  sufficient  revenue to
replace  the  revenue  from  the  phased-out  program  before  the end of  1996.
Accordingly,  these circumstances are expected to have a material adverse effect
on revenues and profits in 1996.

         Cost of sales, as a percentage of net sales,  increased to 77.0 percent
in 1995 as compared  with 69.5 percent in 1994.  This increase was primarily due
to manufacturing  inefficiencies from design delays, new program  introductions,
and product mix.

         Selling,  general and administrative  expense increased to $5.4 million
during 1995 from $4.9 million  during 1994. The 10.2 percent  increase  resulted
primarily from expenses related to expanding the Company's sales force offset by
decreased bonus accruals.  Selling, general and administrative expense increased
as a percentage of net sales to 5.9 percent for 1995 from 5.7 percent for 1994.

         Research and development  expense totaled $2.4 million,  or 2.6 percent
of net sales,  in 1995 as  compared  with $1.3  million,  or 1.5  percent of net
sales,  in 1994. The increase in research and  development  expense  represented
in-house  development  efforts  related to the LCD  laboratory  and  high-volume
manufacturing line located in Tempe, Arizona.

         Interest  income (net) for 1995 was  $765,000,  down from  $859,000 for
1994. The decrease in interest  income was the result of investing lower average
cash balances  during the year.  Other  expense (net)  decreased to $122,000 for
1995 from  $135,000 for 1994.  The decrease was due  primarily to decreased  net
foreign  exchange  losses  and  decreased  net losses on  dispositions  of fixed
assets.

         The provision  for income taxes  decreased to $5.5 million in 1995 from
$8.1 million in 1994. This resulted  primarily from lower pre-tax income in 1995
as compared with 1994.

         Net income decreased to $8.4 million,  or $1.04 per share, in 1995 from
$12.5 million, or $1.59 per share, in 1994.

Year Ended December 31, 1994 Compared with Year Ended December 31,1993

         Net sales were $85.5  million  during 1994,  an increase of 125 percent
compared  with net  sales of $38.0  million  during  1993.  The  sales  increase
resulted primarily from higher order rates from a major wireless  communications
customer for existing as well as new product programs.

         Cost of sales, as a percentage of net sales,  decreased to 69.5 percent
in 1994 as compared  with 70.3 percent in 1993.  This decrease was primarily due
to product mix, as well as higher production volumes and improved  manufacturing
efficiencies.

         Selling,  general and administrative  expense increased to $4.9 million
during 1994 from $3.9 million  during 1993. The 25.6 percent  increase  resulted
primarily from increased  personnel  costs,  corporate fees,  consultant/outside
services,  directors  and officers  insurance,  legal,  and  investor  relations
expenses.  Selling, general and administrative expense decreased as a percentage
of net sales to 5.7 percent for 1994 from 10.1 percent for 1993,  primarily as a
result of increased sales and a continued emphasis on cost containment.

         Research and development  expense totaled $1.3 million,  or 1.5 percent
of net sales, in 1994 as compared with $857,000, or 2.3 percent of net sales, in
1993.  The increase in research and  development  expense  represented  in-house
development efforts related to the LCD laboratory located in Tempe, Arizona.

         Interest income (net) for 1994 was $859,000,  an increase from interest
expense  (net) of  $117,000  for 1993.  The  interest  income  was the result of
investing the net proceeds from the Company's public offering in March

                                       19
<PAGE>

1994,  as well as excess cash  generated  from  operations.  Other expense (net)
decreased  to $135,000  for 1994 from  $277,000  for 1993.  The decrease was due
primarily  to a decrease  in the loss on  disposal  of assets to $54,000 in 1994
from $165,000 in 1993.

         The provision  for income taxes  increased to $8.1 million in 1994 from
$2.0 million in 1993. This resulted primarily from higher pre-tax income and the
Company's  utilization of the majority of its net operating  loss  carryforwards
and other tax credits early in 1993.

         Income before cumulative effect of accounting change increased to $12.5
million,  or $1.59 per share,  in 1994 from $4.1 million,  or $.59 per share, in
1993.

Quarterly Results of Operations

         The following table presents unaudited  consolidated  financial results
for each of the eight  quarters  in the period  ended  December  31,  1995.  The
Company  believes that all necessary  adjustments  have been included to present
fairly the quarterly  information when read in conjunction with the Consolidated
Financial Statements.  The operating results for any quarter are not necessarily
indicative of the results for any subsequent quarter.
<TABLE>
<CAPTION>
                                                                        Quarters Ended
                                    ----------------------------------------------------------------------------------------------
                                                    1995                                                 1994
                                    -------------------------------------            ---------------------------------------------
                                     Mar 31   June 30    Sept 30    Dec 31             Mar 31    June 30      Sept 30      Dec 31
                                     ------   -------    -------    ------             ------    -------      -------      ------
                                                           (in thousands, except per share amounts)
<S>                                 <C>       <C>        <C>        <C>              <C>        <C>           <C>          <C>    
Net sales                           $24,483   $22,105    $24,217    $20,780          $16,421    $21,247       $23,669      $24,140
                                    -------   -------    -------    -------          -------    -------       -------      -------
Costs and expenses:
  Cost of sales                      17,582    16,138     19,790     16,971           11,548     13,802        16,752       17,307
  Selling, general and 
   administrative                     1,272     1,213      1,419      1,482            1,372      1,288         1,170        1,037
  Research and development              405       401        770        820              267        373           310          320
                                        ---       ---        ---        ---              ---        ---           ---          ---

                                     19,259    17,752     21,979     19,273           13,187     15,463        18,232       18,664
                                     ------    ------     ------     ------           ------     ------        ------       ------
Operating income                      5,224     4,353      2,238      1,507            3,234      5,784         5,437        5,476
                                      -----     -----      -----      -----            -----      -----         -----        -----

Other income (expense):
  Interest income (expense), net        342       279        120         24               (9)       265           298          305
  Other, net                            (42)       27        (14)       (93)             (29)       (62)          (33)         (11)
                                        ---        --        ---        ---              ---        ---           ---          --- 

                                        300       306        106       (69)              (38)       203           265          294
                                        ---       ---        ---       ---               ---        ---           ---          ---

Income before provision for 
  income taxes                        5,524     4,659      2,344      1,438            3,196      5,987         5,702        5,770
Provision for income taxes            2,210     1,840        961        537            1,220      2,502         2,306        2,081
                                      -----     -----        ---        ---            -----      -----         -----        -----

Net income                          $ 3,314   $ 2,819    $ 1,383      $ 901           $1,976     $3,485        $3,396       $3,689
                                    =======   =======    =======      =====           ======     ======        ======       ======
Earnings per common share and
  common share equivalent           $  0.41    $ 0.35     $ 0.17     $ 0.11           $ 0.27     $ 0.43        $ 0.42       $ 0.46
                                    =======    ======     ======     ======           ======     ======        ======       ======
Weighted average number of
  common shares and common
  share equivalents outstanding       8,086     8,094      8,088      8,053            7,274      8,095         8,099        8,091
</TABLE>
         Quarterly results can be affected by a number of factors, including the
timing  of  orders  from  major  customers,   customer  delivery   requirements,
production  delays  or  inefficiencies,  the mix of  product  programs,  and raw
material availability.

                                       20
<PAGE>
Seasonality
         The  Company's  net  sales  have not been  subject  to any  significant
seasonal fluctuations or variations.

Liquidity and Capital Resources

         During  1995,  the  Company  generated  $1.3  million in cash flow from
operations as compared with $10.5 million during 1994. The decrease in cash flow
from  operations  was  primarily due to the  Company's  purchase of  significant
amounts  of  materials  for  products  for which  production  was  delayed,  the
liquidation  during  1995  of  significant   payables  and  accrued  liabilities
outstanding  at December 31, 1994 and the  Company's  inability to defer current
income  tax  payments  in 1995 as had been  possible  under the  applicable  tax
regulations in 1994. The Company's working capital decreased to $22.4 million at
December 31, 1995 from $37.6 million at December 31, 1994, primarily as a result
of the cash purchase of the Company's new facility in Tempe, Arizona and related
equipment.  The  Company's  current  ratio at December  31, 1995 was 4.0-to-1 as
compared with a current ratio of 5.0-to-1 at December 31, 1994.

         During 1995, the Company generated cash flow from financing  activities
totalling $2.9 million.  In December 1995, the Company  entered into a new $15.0
million unsecured revolving line of credit, which matures May 31, 1997, with its
primary lender,  First Interstate Bank of Arizona.  The new unsecured  revolving
line of credit  modified the $5.0 million  revolving line of credit entered into
in June 1995.  At December  31,  1995,  $3.0  million had been  borrowed and was
outstanding under this credit facility. Advances under the revolving line may be
made as Prime Rate  Advances,  which accrue  interest  payable  monthly,  at the
bank's prime lending rate, or as LIBOR Rate Advances  which bear interest at 150
basis  points in  excess  of the LIBOR  Base  Rate.  The  Company's  subsidiary,
Three-Five  Systems  Limited,  has  established  an  annually  renewable  credit
facility  with a United  Kingdom  bank,  Barclays Bank PLC, in order to fund its
working  capital  requirements.  The  facility  provides  $350,000 of  borrowing
capacity  secured by accounts  receivable and inventories of Three-Five  Systems
Limited.  Advances are based on 70% of eligible accounts receivable, as defined,
and 30% of inventory,  as defined.  Advances  under the credit  facility  accrue
interest,  which is payable  quarterly,  at the bank's  base rate plus 200 basis
points.  The United Kingdom  credit  facility  matures May 18, 1996.  Three-Five
Systems  Limited  had no  borrowings  outstanding  under  this line of credit at
December 31, 1995.  During 1995, the Company  repaid  $182,000 of long-term debt
with cash flow from operations.

         Capital  expenditures  during 1995 were approximately $27.1 million, as
compared with $7.4 million during 1994. During 1995, approximately $22.2 million
of working  capital was used to complete the  construction of and to furnish and
equip the Company's new Tempe,  Arizona  facility and automated  high-volume LCD
manufacturing  line. The facility was  constructed on a 5.7-acre site,  which is
subject to a ground lease with purchase options. Annual lease payments under the
ground  lease,  which will expire on December 31,  2069,  subject to renewal and
purchase options as well as termination  provisions,  will average approximately
$100,000 over the term of the lease,  subject to certain escalation  provisions.
In addition,  the Company  placed in service  approximately  $4.9 million of new
manufacturing  equipment at the Company's  high-volume  facility in Manila,  the
Philippines.  Capital expenditures for 1994 consisted primarily of manufacturing
equipment for its operations in Manila and Arizona.

         The Company  believes that its capital,  together with loan commitments
described above and anticipated cash flow from operations, will provide adequate
sources to fund  operations in the near term. The Company  anticipates  that any
additional cash requirements as the result of operations or capital expenditures
will be financed  through  cashflow  from  operations  or by borrowing  from the
Company's primary lender.

Effects of Inflation and Foreign Currency Exchange Fluctuations

         The results of operations of the Company for the periods discussed have
not been significantly  affected by inflation or foreign currency  fluctuations.
The Company  generally  sells its products and services and negotiates  purchase
orders with its foreign  suppliers in United States dollars.  Such  transactions
expose the Company to
                                       21
<PAGE>

exchange  rate  fluctuations  for the  period  of  time  from  inception  of the
transaction  until it is settled.  Although  the Company  has not  incurred  any
material  exchange  gains or losses  to date,  there  can be no  assurance  that
fluctuations  in the  currency  exchange  rates in the  future  will not have an
adverse  effect on the  Company's  operations.  The Company has entered and from
time to time will enter  into  hedging  transactions  in order to  minimize  its
exposure to currency rate fluctuations.

ITEM 7.  FINANCIAL STATEMENTS

         Reference is made to the financial statements,  the report thereon, the
notes thereto and the supplementary  data commencing at page F-1 of this Report,
which financial  statements,  report,  notes and data are incorporated herein by
reference.

ITEM  8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

         Not applicable.

                                    PART III

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
          COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         The  information  required by this Item  relating to  directors  of the
Company is  incorporated  by reference to the definitive  Proxy  Statement filed
pursuant  to  Regulation   14A  for  the  Company's   1996  Annual   Meeting  of
Stockholders.  The  information  required  by this Item  relating  to  executive
officers  of the Company is  included  in  "Description  of Business - Executive
Officers" contained in Item 1 of this report.

ITEM 10.  EXECUTIVE COMPENSATION

         The  information  required  by this  Item  is  incorporated  herein  by
reference to the definitive Proxy Statement filed pursuant to Regulation 14A for
the Company's 1996 Annual Meeting of Stockholders.

ITEM  11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  information  required  by this  Item  is  incorporated  herein  by
reference to the definitive Proxy Statement filed pursuant to Regulation 14A for
the Company's 1996 Annual Meeting of Stockholders.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Not applicable.

                                     PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit Number                                Exhibits
--------------                                --------

2                Amended and Restated Agreement and Plan of Reorganization(1)
3(a)             Restated Certificate of Incorporation of the Company(2)
3(b)             Bylaws of the Company(1)
3                Voting Trust Dissolution Certificates effective April 30, 1991
                 and July 31, 1992(3)
10(a)            1990 Incentive Stock Option Plan(1)

                                       22
<PAGE>
10(b)            Line of Credit Agreements between the Company and First 
                 Interstate Bank of Arizona, N.A.(4)
10(c)            Line of Credit Agreement between Three-Five Systems Limited and
                 Barclays Bank, PLC(1)
10(d)            Sub-Assembly  Agreement between  Three-Five  Systems,  Inc. and
                 TEAM Pacific Corporation dated February 22, 1995(4)
10(e)            Lease Agreement between  Three-Five  Systems,  Inc. and Phoenix
                 Tech Center I(1)
10(f)            Second Amendment to Lease between Three-Five Systems,  Inc. and
                 Phoenix Tech Center I(5) 
10(g)            Form  of  Three-Five  Systems,   Inc.   Distributor   Franchise
                 Agreement(5)
10(h)            Form  of  Three-Five   Systems,   Inc.   Sales   Representative
                 Agreement(5)
10(i)            Lease between Three-Five Systems, Inc. and Aetna Life Insurance
                 Company(6)
10(j)            1993 Stock Option  Plan(5) 
10(k)            1994 Automatic Stock Option Plan for Non-employee Directors(7)
10(l)            Lease  Agreement  between  Technology  Electronic  Assembly and
                 Management   (T.E.A.M.)  Pacific   Corporation  and  Three-Five
                 Systems Pacific, Inc.
10(m)            Lease   Agreement   between  Regent  Apparel   Corporation  and
                 Three-Five Systems Pacific, Inc.
10(n)            Second  Modification  Agreement  between First Interstate Bank,
                 N.A. and  Three-Five  Systems,  Inc.,  together with  Revolving
                 Promissory Note for $15,000,000 
11               Statement re: Computation of Per Share Earnings
21               List of Subsidiaries
23               Consent of Arthur Andersen LLP
27               Financial Data Schedule               
-------------    

(1)     Incorporated by reference to the  Registration  Statement on Form S-4 of
        TF Consolidation,  Inc. (Registration No. 33-33944) filed March 27, 1990
        and declared effective March 27, 1990.
(2)     Incorporated  by  reference  to the  Registrant's  Form  10-QSB  for the
        quarter  ended March 31, 1994 filed with the  Commission on or about May
        12, 1994.
(3)     Incorporated by reference to the Registrant's Form 10-KSB for the fiscal
        year ended  December  31,  1992 filed  with the  Commission  on or about
        February 27, 1993.
(4)     Incorporated by reference to the Registrant's Form 10-KSB for the fiscal
        year ended  December  31,  1994 filed with the  Commission  on March 22,
        1995, as amended by Form 10-KSB/A as filed with the  Commission on April
        28, 1995.
(5)     Incorporated  by  reference  to the  Registration  Statement on Form S-1
        (Registration  No.  33-74788)  filed on  February  3, 1994 and  declared
        effective March 15, 1994.
(6)     Incorporated by reference to the Registrant's Form 10-KSB for the fiscal
        year ended December 31, 1991 filed with the Commission on or about March
        27, 1992.
(7)     Incorporated  by  reference  to the  Registration  Statement on Form S-8
        (Registration No. 33-88706) filed on January 24, 1995.

(b)      Financial Statements and Financial Statement Schedule

         (1)     Financial  Statements  are  listed  in the  Index to  Financial
                 Statements on page F-1 of this Report. 
         (2)     Financial Statement Schedule on page S-1.

         Schedule II Valuation and Qualifying Accounts and Reserves

         Other  schedules  are  omitted  because  they are not  applicable,  not
required  or  because  required  information  is  included  in the  consolidated
financial statements or notes thereto.

(c)      Reports on Form 8-K

         Not applicable.
                                       23
<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


Date: March 8, 1996                    By /s/ David R. Buchanan
                                       -----------------------------------------
                                       David R. Buchanan, Chairman of the Board,
                                       President, and Chief Executive Officer


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this Report has been signed by the following  persons in the  capacities  and on
the dates indicated.

         Name                          Title                            Date
         ----                          -----                            ----

/s/ David R. Buchanan         Chairman of the Board, President,    March 8, 1996
---------------------         and Chief Executive Officer
David R. Buchanan             (Principal Executive Officer)
                              


/s/ Randal L. Buness          Vice President - Finance and         March 8, 1996
--------------------          Administration, Chief Financial
Randal L. Buness              Officer, Secretary, and Treasurer
                              (Principal Financial and 
                              Accounting Officer)
                              

/s/ David C. Malmberg         Director                             March 8, 1996
---------------------
David C. Malmberg



/s/ Burton E. McGillivray     Director                             March 8, 1996
-------------------------
Burton E. McGillivray



/s/ Jeffrey A. Wilson         Director                             March 8, 1996
---------------------
Jeffrey A. Wilson

                                       24
<PAGE>
                            THREE-FIVE SYSTEMS, INC.


                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                               SUPPLEMENTARY DATA






                                                                       Page

Report of Independent Public Accountants .............................. F-1

Consolidated Balance Sheets as of December 31, 1995 and 1994 .......... F-2

Consolidated Statements of Income for the years ended
   December 31, 1995, 1994 and 1993.....................................F-3

Consolidated Statements of Stockholders' Equity for the
   years ended December 31, 1995, 1994 and 1993 ........................F-4

Consolidated Statements of Cash Flows for the years ended
   December 31, 1995, 1994 and 1993.................................... F-5

Notes to Consolidated Financial Statements .............................F-6

Schedule II - Valuation and Qualifying Accounts and Reserves
   for the years ended December 31, 1995, 1994 and 1993................ S-1

<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors and Stockholders of
Three-Five Systems, Inc.:


We have  audited the  accompanying  consolidated  balance  sheets of  THREE-FIVE
SYSTEMS,  INC. (a Delaware corporation) and Subsidiaries as of December 31, 1995
and 1994,  and the  related  consolidated  statements  of income,  stockholders'
equity and cash flows for each of the three years in the period  ended  December
31, 1995.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Three-Five  Systems,  Inc. and
Subsidiaries  as of  December  31,  1995  and  1994,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.


                                                             ARTHUR ANDERSEN LLP


Phoenix, Arizona,
   January 20, 1996.

                                      F-1
<PAGE>
                            THREE-FIVE SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except share amounts)

                                        ASSETS
                                                                December 31,
                                                                ------------
                                                            1995           1994
                                                            ----           ----
CURRENT ASSETS:
   Cash and cash equivalents                           $    4,551     $   27,136
   Accounts receivable, net (Note 3)                        9,346          8,721
   Inventories, net (Note 3)                               13,703          9,657
   Deferred tax asset (Note 7)                              1,826          1,048
   Other current assets                                       491            478
                                                          -------         ------
 
                  Total current assets                     29,917         47,040

PROPERTY, PLANT AND EQUIPMENT, net (Note 2)                33,493          8,791

COST IN EXCESS OF NET ASSETS ACQUIRED, net (Note 2)           170            209

OTHER ASSETS (Note 2)                                         200            240
                                                       ----------     ----------
                                                       $   63,780     $   56,280
                                                       ==========     ==========

                         LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                    $    3,199     $    5,088
   Accrued liabilities (Note 2)                             1,318          2,598
   Current maturities of long-term debt (Note 3)            3,000             26
   Current taxes payable (Note 7)                              -           1,690
                                                           ------         ------

                  Total current liabilities                 7,517          9,402

LONG-TERM DEBT, net of current maturities (Note 3)             -             156

DEFERRED TAX LIABILITY (Note 7)                             1,039            161

                                                            1,039            317

COMMITMENTS AND CONTINGENCIES (Note 8)

STOCKHOLDERS' EQUITY (Notes 4 and 5):
   Preferred stock, $.01 par value; 1,000,000 
     shares authorized                                         --             --
   Common stock, $.01 par value; 15,000,000 shares
     authorized, 7,735,745 shares issued and 
     outstanding at December 31, 1995; 7,691,524 
     shares issued and outstanding at December 31, 1994        77             77
   Additional paid-in capital                              32,286         32,052
   Retained earnings                                       22,847         14,430
   Cumulative translation adjustment                           14              2
                                                           ------         ------
                  Total stockholders' equity               55,224         46,561
                                                           ------         ------
                                                       $   63,780     $   56,280
                                                           ======         ======


       The accompanying notes are an integral part of these consolidated
                                balance sheets.

                                       F-2
<PAGE>
                            THREE-FIVE SYSTEMS, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                      (in thousands, except share amounts)
<TABLE>
<CAPTION>
                                                      Years Ended December 31,
                                                      ------------------------
                                                  1995            1994           1993
                                                  ----            ----           ----
<S>                                          <C>            <C>             <C>      
NET SALES (Notes 2, 6 and 9)                 $   91,585     $   85,477      $  38,002
                                                 ------         ------         ------

COSTS AND EXPENSES:
   Cost of sales                                 70,481         59,409         26,725
   Selling, general and administrative            5,386          4,867          3,853
   Research and development                       2,396          1,270            857
                                                  -----          -----            ---

                                                 78,263         65,546         31,435
                                                 ------         ------         ------

   Operating income                              13,322         19,931          6,567
                                                 ------         ------          -----
OTHER INCOME (EXPENSE):
   Interest, net                                    765            859           (117)
   Other, net                                      (122)          (135)          (277)
                                                 ------         ------          ----- 

                                                    643            724           (394)
                                                 ------         ------          ----- 
INCOME BEFORE PROVISION FOR INCOME TAXES
   AND CUMULATIVE EFFECT OF ACCOUNTING
   CHANGE                                        13,965         20,655          6,173

   Provision for income taxes (Note 7)            5,548          8,109          2,043
                                    -            ------         ------          -----

INCOME BEFORE CUMULATIVE EFFECT OF
   ACCOUNTING CHANGE                              8,417         12,546          4,130
     Cumulative effective of accounting
     change (Note 7)                                 --             --            924
                  -                              ------         ------          -----

NET INCOME                                   $    8,417     $   12,546      $   5,054
                                                 ------         ------          -----
EARNINGS PER COMMON SHARE AND COMMON 
 SHARE EQUIVALENT (Notes 2 and 4):
     Income before cumulative effect of 
     accounting change                           $ 1.04        $  1.59         $ 0.59
     Cumulative effect of accounting 
     change (Note 7)                                 --             --           0.13
                                                 ------          -----           ----

     Net income                                  $ 1.04        $  1.59         $ 0.72
                                                 ------        -------         ------

WEIGHTED AVERAGE NUMBER OF COMMON 
   SHARES AND COMMON SHARE 
   EQUIVALENTS OUTSTANDING (Notes 2 and 4)    8,083,551      7,882,011      7,040,118
                                              =========      =========      =========
</TABLE>

              The accompanying notes are an integral part of these
                            consolidated statements.
<PAGE>
                            THREE-FIVE SYSTEMS, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
                      (in thousands, except share amounts)
<TABLE>
<CAPTION>
                                                  Common Stock
                                                  ------------
                                                                                   Additional   Cumulative
                                                Shares                 Paid-in      Retained   Translation
                                                Issued     Amount      Capital      Earnings    Adjustment       Total
                                                ------     ------      -------      --------    ----------       -----

<S>                                            <C>          <C>     <C>           <C>            <C>         <C>       
BALANCE, December 31, 1992                     6,426,260    $   64  $    7,767    $   (3,170)    $  -        $    4,661
     Stock options exercised                     215,684         2          36            -         -                38
     Tax benefit from early disposition of
       incentive stock options (Note 5)               -         -          440            -         -               440
     Net income                                       -         -           -          5,054        -             5,054
     Translation adjustment                           -         -           -             -          9                9
                                               --------        ---       -----         -----       ---            -----

BALANCE, December 31, 1993                     6,641,944        66       8,243         1,884         9           10,202
     Stock options exercised                      49,580         1          64            -         -                65
     Tax benefit from early disposition of
       incentive stock options (Note 5)               -         -          500            -         -               500
     Sale of common stock, net                 1,000,000        10      23,245            -         -            23,255
     Net income                                       -         -           -         12,546        -            12,546
     Translation adjustment                           -         -           -             -         (7)              (7)
                                               --------        ---      ------        ------       ---           ------

BALANCE, December 31, 1994                     7,691,524        77      32,052        14,430         2           46,561
     Stock options exercised                      44,221        -           32            -         -                32
     Tax benefit from early disposition
       of incentive stock options (Note 5)            -         -          202            -         -               202
     Net income                                       -         -           -          8,417        -             8,417
     Translation adjustment                           -         -           -             -         12               12
                                               ---------       ---      ------        ------       ---            -----

BALANCE, December 31, 1995                     7,735,745    $   77  $   32,286    $   22,847     $  14       $   55,224
                                               =========       ===      ======        ======       ===           ======

</TABLE>
The accompanying  notes are an integral part of these consolidated statements.

                                      F-4
<PAGE>
                            THREE-FIVE SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                                                 ------------------------
                                                                             1995           1994            1993
                                                                             ----           ----            ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                    <C>             <C>            <C>       
   Net income                                                          $    8,417      $  12,546      $    5,054
   Adjustments to reconcile net income to net cash provided
     by operating activities-
       Depreciation and amortization                                        2,278          1,215             545
       Cumulative effect of accounting change                                  -              -             (924)
       Provision (recovery) of accounts receivable valuation reserves          (1)           205              52
       Provision (reduction) of inventory valuation reserves                1,218            857            (107)
       Loss on disposal of assets                                              24             54             165

   Changes in assets and liabilities-
     Increase in accounts receivable                                         (624)        (3,609)         (2,153)
     Increase in inventories                                               (5,264)        (3,406)         (2,976)
     Increase in other assets                                                 (32)          (225)           (185)
     Increase (decrease) in accounts payable and accrued liabilities       (3,170)         1,788           3,036
     Increase (decrease) in taxes payable, net                             (1,568)         1,065           1,498
                                                                           ------         ------           -----

                  Net cash provided by operating activities                 1,278         10,490           4,005
                                                                           ------         ------           -----

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property, plant and equipment                              (27,051)        (7,412)         (1,883)
   Proceeds from sale of property, plant and equipment                        326              5              -
                                                                           ------          -----           -----

                  Net cash used for investing activities                  (26,725)        (7,407)         (1,883)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from (payments on) notes payable to banks                   3,000            (17)         (1,390)
   Principal payments on and retirement of long-term debt                    (182)           (24)           (571)
   Stock options exercised                                                     32             65              38
   Proceeds from sale of common stock, net (Note 4)                            -          23,255              -
                                                                            -----         ------           -----

                  Net cash provided by (used for) financing activities      2,850         23,279          (1,923)
                                                                            -----         ------          ------ 

   Effect of exchange rate changes on cash                                     12             (7)              9
                                                                            -----         ------          ------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                      (22,585)        26,355             208

CASH AND CASH EQUIVALENTS, beginning of year                               27,136            781             573
                                                                           ------         ------             ---

CASH AND CASH EQUIVALENTS, end of year                                 $    4,551      $  27,136      $      781
                                                                           ------         ------          ------

SUPPLEMENTAL CASH FLOW INFORMATION:
   Interest paid                                                       $       12      $      21      $       93
                                                                           ------         ------          ------

   Income taxes paid                                                   $    7,296      $   7,103      $      609
                                                                           ======         ======          ======
</TABLE>
 The accompanying notes are an integral part of these consolidated statements.

                                       F-5
<PAGE>
                            THREE-FIVE SYSTEMS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1995, 1994 AND 1993




(1)   ORGANIZATION:

Three-Five  Systems,  Inc. (the Company) was incorporated  under the laws of the
state of Delaware on February 13, 1990, under the name of TF Consolidation, Inc.
On February 14, 1990, the Company entered into an amended and restated agreement
and plan of  reorganization  providing  for the  merger of  Electronic  Research
Associates, Inc. (ERA; a New Jersey corporation) and Three-Five Systems, Inc. (a
privately  owned  Delaware  corporation)  into the  Company.  The merger  became
effective  May 1, 1990,  following  stockholder  approval.  The  Company was the
surviving  corporation;  the separate corporate existences of ERA and Three-Five
Systems,  Inc. ceased;  and the Company changed its corporate name to Three-Five
Systems, Inc.

The Company designs and manufactures a wide range of user interface  devices for
operational  control and  informational  display  functions  required in the end
products  of  original  equipment  manufacturers.  Most of the  Company's  sales
consist of custom user interface devices developed in close  collaboration  with
its  customers.  The Company  maintains  its primary  manufacturing  facility in
Manila, the Philippines. A third-party subcontractor operates the facility under
a sub-assembly  agreement with the Company  utilizing  equipment,  processes and
documentation  owned by the Company.  The  sub-assembly  agreement has a current
term extending through December 31, 1999, and from year to year thereafter,  but
may be terminated by either party upon 180 days written notice.  The termination
of or  the  inability  of  the  Company  to  obtain  products  pursuant  to  the
sub-assembly  agreement,  even  for a  relatively  short  period,  would  have a
material  adverse  effect on the operations  and  profitability  of the Company.
Since December 1994, the Company has made advances totaling  approximately  $1.5
million to the subcontractor that operates the sub-assembly facility to help the
subcontractor  in meeting its working capital needs. The balance of the advances
outstanding,  in excess of amounts payable to the  subcontractor at December 31,
1995, was approximately $500,000.  These advances are secured by future payments
for  subcontracting  services  to be  provided  to the  Company as well as other
assets of the subcontractor.

Three-Five Systems Limited (Limited),  a wholly owned subsidiary of the Company,
is  incorporated  in the  United  Kingdom.  Limited  sells and  distributes  the
Company's products to customers on the European continent.

During  1994,  the Company  dissolved  its wholly  owned  subsidiary,  Certified
Electronics  Ltd.  (CEL).  CEL, a Taiwan  corporation , procured  materials from
Taiwanese vendors. This function is now performed directly by the Company.

                                      F-6
<PAGE>

During 1995, the Company formed a wholly owned  subsidiary,  Three-Five  Systems
Pacific, Inc. (Pacific).  Pacific, a Philippines corporation,  procures supplies
primarily from Philippine vendors.

(2)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         Principles of Consolidation and Preparation of Financial Statements

The consolidated  financial  statements  include the accounts of the Company and
its wholly-owned subsidiaries.  All material intercompany transactions have been
eliminated.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

         Cash and Cash Equivalents

For purposes of the statements of cash flows, all highly liquid investments with
a maturity of three months or less at the time of purchase are  considered to be
cash equivalents. Cash equivalents consist primarily of United States government
agencies'   obligations   classified  as  held-to-maturity  in  accordance  with
Statement of Financial  Accounting  Standards  No. 115,  Accounting  for Certain
Investments in Debt and Equity  Securities.  At December 31, 1994, the aggregate
amortized cost and fair value of these cash equivalents totaled $23,820,000 with
maturity  dates from January 23, 1995 through March 2, 1995.  There were no cash
equivalents at December 31, 1995.

         Inventories

Inventories  are  stated  at the  lower  of cost  (first-in,  first-out)  or net
realizable value. Reserves are established against Company-owned inventories for
excess,  slow-moving  and obsolete  items and for items where the net realizable
value is less than cost.

Inventories consist of the following at December 31:

                                                  1995           1994
                                                  ----           ----
                                                     (in thousands)

                  Raw materials                $   9,257      $    6,926
                  Work-in-process                  2,002             697
                  Finished goods                   2,444           2,034
                                                   -----           -----

                                               $  13,703      $    9,657
                                                  ======           =====

                                      F-7

<PAGE>


         Other Assets

In December 1991,  the Company  decided to dispose of its  Connecticut  facility
and, as a result,  stopped  depreciation and classified the facility  (primarily
land and  building) in other  assets on the  accompanying  consolidated  balance
sheets. Provisions of approximately $50,000 and $110,000 were recorded to reduce
the  facility  to its  estimated  net  realizable  value  during  1994 and 1993,
respectively.  The Company  sold the  facility in June 1995 and reported the net
gain in other, net, in the accompanying consolidated statements of income.

         Revenue Recognition

The  Company  recognizes  revenues  upon  shipment.  The  Company's  distributor
agreements provide for stock (inventory) rotation and price protection. Reserves
are provided for each of these programs based on past return  experience.  These
reserves  are  established  at the time of  shipment  and reduce  gross sales to
arrive at net sales as presented in the accompanying  consolidated statements of
income.  These reserves are reflected as a reserve against  accounts  receivable
from sales to  distributors  and totaled  $140,000  and $366,000 at December 31,
1995 and 1994,  respectively.  The Company's  distributors  generally offset any
returns and allowances against payments on accounts receivable. The Company also
provides reserves for uncollectible accounts receivable.  These reserves totaled
$463,000 and $238,000 at December 31, 1995 and 1994, respectively.

         Property, Plant and Equipment

Property,  plant and  equipment  is recorded at cost and  depreciated  using the
straight-line  method over the estimated useful lives of the respective  assets,
which range from 3 to 39 years.  Property,  plant and  equipment  consist of the
following at December 31:

                                                      1995           1994
                                                      ----           ----
                                                         (in thousands)

          Building                                 $   10,375     $        -
          Furniture and equipment                      27,971          10,056
          Construction-in-process (Note 8)                 -            1,825
                                                       ------          ------
                                                       38,346          11,881
          Less- accumulated depreciation               (4,853)         (3,090)
                                                       ------          ------ 

                                                   $   33,493     $     8,791
                                                       ======           =====

At December 31, 1994, $1,825,000 of progress payments made by the Company toward
the  construction of its new design,  manufacturing  and corporate  headquarters
facility  were  included in property,  plant and  equipment on the  accompanying
consolidated balance sheets.

During 1995,  the Company  completed the  construction  and equipping of its new
facility  described above. The Company intends to utilize a significant  portion
of the facility to produce a substantial portion of its own requirements for LCD
glass.  The successful  utilization of the facility will require the Company (i)
to produce LCD glass on a timely and  cost-effective  basis at quality levels at
least equal to the LCD glass  available from  independent  suppliers and (ii) to
utilize the LCD glass it produces  in devices it designs and  manufactures  in a
manner
                                      F-8
<PAGE>

satisfactory to its customers.  Although  management  believes that the facility
will be successfully  utilized,  no assurance can be given that the Company will
not experience  problems or delays in  implementing  or conducting its LCD glass
manufacturing operations. Such problems could require the Company to continue to
purchase  its LCD  glass  requirements  from  third  parties  and  result in the
inability of the Company to recover its investment in the facility.

         Cost in Excess of Net Assets Acquired

The merger  between  Three-Five  Systems,  Inc. and ERA was  accounted  for as a
purchase in  accordance  with  Accounting  Principles  Board Opinion No. 16 with
Three-Five Systems, Inc. considered the acquiring entity. The excess of the cost
over the net assets of ERA acquired in the amount of $379,100 is being amortized
over ten years.  Accumulated  amortization  totaled  $209,600  and  $170,000  at
December 31, 1995 and 1994, respectively.

         Accrued Liabilities

Accrued liabilities  includes accrued compensation of $441,000 and $1,462,000 at
December 31, 1995 and 1994, respectively.

         Foreign Currency Translation

Financial information relating to the Company's foreign subsidiaries is reported
in accordance with Statement of Financial  Accounting  Standards No. 52, Foreign
Currency Translation.  The net foreign currency transaction gain (loss) in 1995,
1994 and 1993 was $(32,000),  $(41,000) and $1,000,  respectively,  and has been
included in other expenses in the  accompanying  statements of income.  The gain
(loss) resulting from the translation of the subsidiaries'  financial statements
has been included as a separate component of stockholders' equity.

         Earnings Per Common Share

Earnings per share is computed by dividing net earnings by the weighted  average
number of common shares and common share equivalents  assumed outstanding during
the year.  Fully  diluted  earnings  per share is  considered  equal to  primary
earnings per share in all periods presented.

         Recently Issued Accounting Standards

Statement  of  Financial  Accounting  Standards  No.  121,  Accounting  for  the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of,
which is required to be adopted by the Company in fiscal  1996,  is not expected
to have a material effect on the Company's  financial position or its results of
operations  upon  adoption.  The Company also is required to adopt  Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based  Compensation
(SFAS No. 123) in fiscal 1996.  Pursuant to the  provisions of SFAS No. 123, the
Company will continue to account for transactions with its employees pursuant to
Accounting  Principles  Board  Opinion No. 25,  Accounting  for Stock  Issued to
Employees.  Therefore,  this statement is not expected to have a material effect
on the Company's financial position or its results of operations when adopted.

                                      F-9
<PAGE>
(3)   LONG-TERM DEBT:

Long-term debt consists of the following at December 31:

                                                          1995           1994
                                                          ----           ----
                                                            (in thousands)
  $15,000,000  revolving  line of  credit,  
  interest  due  monthly at the bank's prime 
  rate (8.5% at December 31, 1995) or at the 
  LIBOR base rate (5.5% to 5.7% at December 31,
  1995) plus 1.50%, unpaid balance due May 31, 1997   $   3,000       $    -

  $350,000 United Kingdom credit facility,  
  interest due quarterly at the bank's base 
  rate (5.375% at December 31, 1995) plus 2%, 
  unpaid  balance due May 18, 1996, secured by 
  United Kingdom accounts receivable and inventory           -             -

  Mortgage payable to Connecticut Development
  Authority (Note 2)                                        -             182
                                                          -----           ---
                                                          3,000           182
  Less- current maturities                               (3,000)          (26)
                                                          -----           --- 

                                                      $      -        $   156
                                                          -----           ---

In December 1995, the Company entered into a $15.0 million  unsecured  revolving
line of credit  which  matures May 31, 1997.  The  unsecured  revolving  line of
credit replaced a $5.0 million  revolving line of credit.  The weighted  average
interest rate on borrowings outstanding under the line of credit during 1995 was
7.31%. The Company intends to pay down the outstanding balance under the line of
credit during fiscal 1996 and has therefore classified the balance as current on
the accompanying balance sheets. The unsecured revolving line of credit contains
certain restrictive covenants which include, among other things, restrictions on
the declaration or payment of dividends and the amount of capital  expenditures.
The line also  requires  the  Company to  maintain  a  specified  net worth,  as
defined,  to maintain a required  debt to equity  ratio and to maintain  certain
other financial ratios.

Advances under the United  Kingdom credit  facility are based on 70% of eligible
accounts receivable,  as defined, and 30% of inventory,  as defined.  Management
intends to renew the United Kingdom credit  facility and does not anticipate any
material changes to the existing terms.

(4)   STOCKHOLDERS' EQUITY:

During 1994, the Company's Board of Directors declared a two-for-one stock split
effected  in the form of a 100  percent  stock  dividend  whereby  the number of
common  shares  outstanding  was  increased  from  3,824,622 to  7,649,244.  The
3,824,622  additional shares of common stock were distributed on May 4, 1994, to
holders of record on April 22, 1994.  All share  amounts and per share data have
been  restated  for all periods  presented  to reflect  this split.  In addition
during 1994, the Company's stockholders approved an amendment to the Certificate
of
                                      F-10
<PAGE>

Incorporation  which increased the authorized  shares of common stock, par value
$.01 per share, from 5,000,000 to 15,000,000 and eliminated the authorization to
issue  shares of Class A  Preferred  stock,  par value $.01 per  share,  Class B
Preferred  stock, no par value,  and Class C Preferred stock, par value $.01 per
share. The Company's  authorized capital stock also includes 1,000,000 shares of
serial preferred stock, par value $.01 per share.

In March 1994, the Company  completed a public offering of 2,120,000  shares, of
which  1,000,000  shares of common stock were sold by the Company and  1,120,000
were  sold  by a  selling  stockholder.  Net  proceeds  to the  Company  totaled
approximately $23.3 million, net of issuance costs of $1,745,000.

(5)   EMPLOYEE BENEFIT PLANS:

         1994 Non-Employee Directors Stock Option Plan

The  Non-Employee  Directors  Stock  Option  Plan (1994 Plan)  provides  for the
automatic  grant of stock  options to  non-employee  directors to purchase up to
100,000  shares.  Under the 1994 Plan,  options to acquire  500 shares of common
stock will be automatically granted to each non-employee director at the meeting
of the  Board of  Directors  held  immediately  after  each  annual  meeting  of
stockholders,  with such options to vest in a series of 12 equal and  successive
monthly installments commencing one month after the annual automatic grant date.
In addition, each non-employee director serving on the Board of Directors on the
date the 1994  Plan was  approved  by the  Company's  stockholders  received  an
automatic  grant of  options to acquire  1,000  shares of common  stock and each
subsequent  newly  elected  non-employee  member of the Board of Directors  will
receive an automatic grant of options to acquire 1,000 shares of common stock on
the date of their first appointment or election to the Board of Directors. Those
options  become  exercisable  and vest in a series of three equal and successive
annual  installments,  with the first such installment  becoming  exercisable 13
months after the  automatic  grant date. A  non-employee  member of the Board of
Directors  is not  eligible to receive the 500 share  automatic  option grant if
that option grant date is within 30 days of such  non-employee  member receiving
the 1,000 share automatic  option grant.  The exercise price per share of common
stock  subject to options  granted  under the 1994 Plan will be equal to 100% of
the fair market value of the Company's common stock on the date such options are
granted. There were outstanding options to acquire 6,500 shares of the Company's
common stock under the 1994 Plan at December 31, 1995.

         1993 Stock Option Plan

The 1993 Stock  Option Plan (1993 Plan)  provides for the granting of options to
purchase up to 385,454  shares of the  Company's  common stock  (which  includes
85,454 shares  previously  reserved for issuance  under the Company's 1990 Stock
Option Plan),  the direct granting of common stock (stock awards),  the granting
of stock appreciation  rights (SARs) and the granting of other cash awards (cash
awards) (stock awards, SARs and cash awards are collectively  referred to herein
as  Awards).  Under  the 1993  Plan,  options  and  Awards  may be issued to key
personnel  and  others  providing  valuable  services  to the  Company  and  its
subsidiaries.  The options issued may be incentive stock options or nonqualified
stock options.

                                      F-11
<PAGE>


If any option or SAR  terminates  or expires  without  having been  exercised in
full,  stock not issued under such option or SAR will again be available for the
purposes of the 1993 Plan.  There were  outstanding  options to acquire  220,500
shares of the Company's common stock under the 1993 Plan at December 31, 1995.

To the extent that granted  options are incentive  stock options,  the terms and
conditions  of  those  options  must  be  consistent   with  the   qualification
requirement set forth in the Internal Revenue Code of 1986. The expiration date,
maximum  number of shares  purchasable  and the other  provisions of the options
will be established at the time of grant. Options may be granted for terms of up
to ten years and become  exercisable in whole or in one or more  installments at
such  time as may be  determined  by the plan  administrator  upon  grant of the
options.  The  exercise  prices  of  options  will  be  determined  by the  plan
administrator,  but may not be less than 100 percent  (110 percent if the option
is granted  to a  stockholder  who at the time the option is granted  owns stock
representing  more than ten percent of the total  combined  voting  power of all
classes of stock of the Company) of the fair market value of the common stock at
the time of the grant.  The 1993 Plan will  remain in force until  February  24,
2003.

         1990 Stock Option Plan

In conjunction with the 1990 merger with ERA, the Three-Five Systems,  Inc. 1987
Incentive  Stock Option Plan (1987 Plan) was replaced with a new Incentive Stock
Option Plan ("1990 Plan"). Options issued under the 1987 Plan were assumed under
the 1990  Plan.  Under the 1990  Plan,  there are  312,576  options  issued  but
unexercised as of December 31, 1995. In conjunction with stockholder approval of
the 1993 Plan,  the Board  terminated  the 1990 Plan with  respect  to  unissued
options to  purchase  85,454  shares of common  stock  which  remained  and were
unissued as of the date the 1993 Plan was adopted.  The 1990 Plan will remain in
force through May 1, 2000.

The  expiration  date,  maximum  number  of  shares  purchasable,  and the other
provisions of the options  granted under the 1990 Plan were  established  at the
time of grant.  Options  were  granted  for terms of up to ten years and  become
exercisable  in  whole  or in one or more  installments  at such  times  as were
determined by the Board of Directors upon grant of the options.

The exercise price of incentive stock options granted and assumed under the 1990
Plan range from $0.255 to $1.595 per share.  These exercise  prices are not less
than 100% (110% if the option was granted to a  stockholder  who at the time the
option was granted owned stock  representing more than 10% of the total combined
voting  power of all classes of stock of the  Company) of the closing  price the
day before the date of original grant.

Tax benefits from early  disposition of common stock by optionees under the 1993
and 1990 Plans and from the  exercise of  nonqualified  options are  credited to
additional paid-in capital.

                                      F-12
<PAGE>

The following  summarizes the combined activity for the 1994 Plan, 1993 Plan and
1990 Plan:
<TABLE>
<CAPTION>
                                          December 31, 1995                         December 31, 1994
                                          -----------------                         -----------------
                                     Number of            Option               Number of            Option
                                      Shares          Price Per Share           Shares          Price Per Share
                                      ------          ---------------           ------          ---------------
<S>                                  <C>            <C>        <C>              <C>           <C>        <C>
Options outstanding at    
   beginning of year                 465,326        $  0.255 - $34.3750         523,406       $  0.255 - $10.065
     Granted                         178,000        $ 16.625 - $35.8750          88,000       $ 16.938 - $44.375
     Canceled                        (59,500)       $  1.190 - $35.8750         (96,500)      $  1.531 - $44.375
     Exercised                       (44,250)       $  0.255 - $ 9.5625         (49,580)      $  0.255 - $ 4.375
                                     -------                                    -------
Options outstanding at
   end of year                       539,576        $  0.255 - $ 34.375         465,326       $  0.255 - $34.375
                                     -------                                    -------
Options available for grant          356,454                                    474,954
                                     -------                                    -------
Exercisable at end of year           300,543        $  0.255 - $34.375          307,826       $  0.255 - $ 3.00
                                     -------                                    -------
</TABLE>

         401(k) Profit Sharing Plan

Effective  September 1, 1990, the Company  adopted a profit sharing plan (401(k)
Plan)  pursuant to Section  401(k) of the  Internal  Revenue  Code of 1986.  The
401(k)  Plan  covers   substantially  all  full-time   employees  who  meet  the
eligibility  requirements  and  provides  for  a  discretionary  profit  sharing
contribution  by  the  Company  and an  employee  elective  contribution  with a
discretionary  Company matching  provision.  The Company expensed  discretionary
contributions  pursuant  to the 401(k)  Plan in the amount of $0,  $94,000,  and
$95,000 for the years ended December 31, 1995, 1994, and 1993, respectively.

(6)   MAJOR CUSTOMERS:

The Company's  strategy  involves  concentrating its efforts on providing design
and production services to leading companies in a limited number of fast growing
industries.  Sales to the Company's  largest customer are made through 11 buyers
operating  in  five  separate  product  divisions.   During  1995,  the  Company
manufactured  approximately  40 individual  product  programs for this customer.
Devices that are used in cellular telephones  accounted for substantially all of
the Company's sales to this customer in 1995.

The  percentages of net sales to customers to whom sales exceed 10% of total net
sales were as follows:

                                      1995             1994              1993
                                      ----             ----              ----

          Customer #1                   81%               84%              64%
          Customer #2                    3%                4%              11%

(7)   INCOME TAXES:

Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards  No. 109 (SFAS No. 109),  Accounting  for Income  Taxes.  SFAS No. 109
requires the use of an asset and  liability  approach in  accounting  for income
taxes. Deferred tax assets and liabilities are

                                      F-13
<PAGE>

recorded based on the differences  between the financial statement and tax bases
of assets and liabilities and the tax rates in effect when these differences are
expected to reverse.  Upon  adoption  of SFAS No.  109,  the Company  recorded a
cumulative effect of the change in accounting principle of $924,000.

The  provision  for income taxes  consists of the  following for the years ended
December 31:
<TABLE>
<CAPTION>

                                                                              1995         1994         1993
                                                                              ----         ----         ----
                                                                                      (in thousands)
<S>                                                                        <C>          <C>             <C> 
         Current, net of operating loss carryforwards
           and tax credits utilized
                Federal, net of tax benefit from early  
                  termination of incentive stock options                   $   2,775    $   5,102       $  321
                State                                                            790        1,389          312
                Foreign                                                        1,681        1,403          810
                                                                               5,246        7,894        1,443
                                                                               -----        -----        -----

         Deferred provision (benefit)                                            100         (285)         160
         Tax benefit from early termination of incentive
           stock options, reflected in stockholders' equity                      202          500          440
                                                                                 ---          ---          ---

                Provision for income taxes                                 $   5,548    $   8,109       $2,043
                                                                               =====        =====        ======
</TABLE>
In  accordance  with SFAS No.  109, a tax benefit  for net  operating  losses of
approximately  $67,000,  $67,000,  and $363,000 and tax credits of approximately
$0, $1,478,000, and $537,000 utilized in 1995, 1994 and 1993, respectively,  are
included as a reduction of the  provision  for income taxes in the  consolidated
statements of income.

The components of deferred taxes are as follows at December 31:
<TABLE>
<CAPTION>

                                                                                           1995           1994
                                                                                           ----           ----
                                                                                              (in thousands)
<S>                                                                                     <C>             <C>
         Net long-term deferred tax liabilities:     
           Excess of book basis over tax basis in facility                              $      -        $     41
           Accelerated tax depreciation                                                     1,002            124
           Other                                                                               37             (4)
                                                                                            -----            --- 

                                                                                        $   1,039       $    161
                                                                                            -----            ---
         Net short-term deferred tax assets:
           Tax effect of regular U.S. net operating loss carryforward                   $     212       $    516
           Inventory reserve                                                                1,080            587
           Uniform capitalization                                                             456            189
           Allowance for doubtful accounts                                                    159             80
           Other                                                                              101            125
                                                                                            -----          -----
                                                                                            2,008          1,497
           Valuation allowance                                                               (182)          (449)
                                                                                            -----          ----- 

                                                                                        $   1,826       $  1,048
                                                                                            =====          =====
</TABLE>

                                      F-14
<PAGE>


SFAS No. 109  requires  the  reduction  of  deferred  tax assets by a  valuation
allowance if, based on the weight of available evidence,  it is more likely than
not that some or all of the  deferred  tax  assets  will not be  realized.  As a
result of certain  limitations  on the use of net operating  loss  carryforwards
acquired in the ERA acquisition,  a valuation allowance has been established for
those net operating losses not likely to be realized.

A reconciliation of the U.S. federal statutory rate to the Company's effective 
tax rate is as follows:
                                                1995         1994           1993
                                                ----         ----           ----

   Statutory federal rate                        34%          35%            34%
   Effect of foreign operations                  -             4              1
   Effect of state taxes                          6            7              6
   Benefit of net operating loss                 -            -              (6)
   Effect of tax credits                         -            (7)            (2)

                                                 40%          39%            33%

Net operating loss carryforwards for federal tax purposes totaled  approximately
$624,000 at December  31,  1995.  The use of these  carryforwards  is limited to
$67,000 per year and they expire through 2003.

(8)   COMMITMENTS AND CONTINGENCIES:

In March 1995, the Company entered into a noncancelable  operating lease for its
primary  manufacturing  facility in Manila,  the Philippines.  The lease expires
December  31, 1999.  In April 1995,  the Company  entered  into a  noncancelable
operating  lease  for  an  additional  manufacturing  facility  in  Manila,  the
Philippines. The lease expires March 31, 1997.

Rent  expense was  approximately  $683,000,  $280,000 and $223,000 for the years
ended December 31, 1995, 1994, and 1993, respectively.

In April 1994, the Company  entered into a ground lease (with purchase  options)
on a 5.7 acre site in Tempe,  Arizona.  Annual lease  payments  under the ground
lease,  which will expire on March 31,  2069,  subject to renewal  and  purchase
options as well as termination  provisions,  will average approximately $100,000
over the term of the lease  subject  to  certain  escalation  provisions.  A new
design,   manufacturing,   and  corporate   headquarters   facility   containing
approximately  97,000 square feet was completed on the land in 1995 at a cost of
approximately $10.4 million.

The Company's future lease commitments under the noncancelable  operating leases
as of December 31, 1995, are as follows:

                  1996                                    $     491,000
                  1997                                          377,000
                  1998                                          357,000
                  1999                                          357,000
                  2000                                          100,000
                  Thereafter                                  6,825,000
                                                              ---------

                                                          $   8,507,000
                                                          =============

                                      F-15
<PAGE>

On January 24, 1991, the Company  received from the United States  Environmental
Protection Agency (EPA) a notice of potential  liability at the  Barkhamsted-New
Hartford Landfill site in Barkhamsted, Connecticut. The notice was to notify the
Company of its  potential  liability  with  respect to the site and  request the
Company's voluntary participation in undertaking cleanup activities at the site.
On January 9, 1992,  the Company  received an  additional  104(e)  questionnaire
which was completed and submitted during 1992. This matter is still in discovery
and  therefore,  the Company and its  consultants  are unable to  determine  the
outcome or potential range of loss, if any.

The  Company is involved in certain  administrative  proceedings  arising in the
normal course of business. In the opinion of management, the Company's potential
exposure under the pending administrative proceedings is adequately provided for
in the accompanying financial statements.

(9)   GEOGRAPHIC SEGMENTS:

Sales by geographic  area and  identifiable  assets for the years ended December
31, 1995, 1994, and 1993 were as follows:
<TABLE>
<CAPTION>
                                      North
                                     America      Europe       Taiwan      Pacific Rim  Eliminations    Consolidated
                                     -------      ------       ------      -----------  ------------    ------------
                                                                    (in thousands)
<S>                                 <C>          <C>          <C>           <C>          <C>              <C>
December 31, 1995:      
   Net sales                        $ 24,235     $  67,350    $      -      $     -      $       -        $  91,585
   Transfers to Europe                60,361            -            -            -         (60,361)             -
   Transfers to North America             -             -            -         1,437         (1,437)             -
                                      ------        ------         ----        -----         ------          ------

           Total revenue            $ 84,596     $  67,350    $      -      $  1,437     $  (61,798)      $  91,585
                                      ------        ------         ----        -----         ------          ------

   Net income (loss)                $  5,093     $   3,353    $      -      $    (46)    $       17       $   8,417
                                      ------        ------         ----        -----         ------          ------
   Identifiable assets              $ 50,779     $   8,491    $      -      $  7,789     $   (3,279)      $  63,780
                                      ------        ------         ----        -----         ------          ------

December 31, 1994:
   Net sales                        $ 33,774     $  51,703    $      -      $     -      $       -        $  85,477
   Transfers to Europe                46,813            -            -            -         (46,813)             -
   Transfers to North America             -             -         1,750           -          (1,750)             -
                                      ------        ------        -----        -----         ------          ------

   Total revenue                    $ 80,587     $  51,703    $   1,750     $     -      $  (48,563)      $  85,477
                                      ------        ------        -----        -----         ------          ------
   Net income (loss)                $ 12,668     $    (457)   $     637     $     -      $     (302)      $  12,546
                                      ------        ------        -----        -----         ------          ------
   Identifiable assets              $ 48,743     $   7,912    $       2     $  4,292     $   (4,669)      $  56,280
                                      ------        ------        -----        -----         ------          ------

December 31, 1993:
   Net sales                        $ 24,200     $  13,802    $      -      $     -      $       -        $  38,002
   Transfers to Europe                10,128            -            -            -         (10,128)             -
   Transfers to North America             -             -         1,991           -          (1,991)             -
                                      ------       -------        -----        -----         ------          ------

   Total revenue                    $ 34,328     $  13,802    $   1,991     $     -      $  (12,119)      $  38,002
                                      ------        ------        -----        -----         ------          ------
   Net income                       $  3,535     $     769    $     722     $     -      $       28       $   5,054
                                      ------        ------        -----        -----         ------          ------
   Identifiable assets              $ 14,251     $   2,417    $   2,090     $  1,121     $   (2,409)      $  17,470
                                      ------        ------        -----        -----         ------          ------

</TABLE>

                                      F-16
<PAGE>
                            THREE-FIVE SYSTEMS, INC.
          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993

<TABLE>
<CAPTION>



                            Balance at        Charged to                 Charged to                               Balance at
                             Beginning         Costs and                   Other                                      End
                             of Period         Expenses                   Accounts                Other            of Period
                             ---------         --------                   --------                -----            ---------
                                                        (in thousands)
<S>                               <C>                  <C>                 <C>                    <C>                   <C>
Allowance for doubtful 
accounts and sales 
returns and allowances:

Year ended 
December 31, 1995                   $604                (36)                35(1)                     -                   $603

Year ended
December 31, 1994                   $399                248                (60)(1)                   17(2)                $604

Year ended
December 31, 1993                   $346                179                (70)(1)                  (56)(2)               $399

Inventory Reserve:

Year ended
December 31, 1995                 $1,548              1,563                391(4)                  (735)(3)             $2,767

Year ended
December 31, 1994                   $691              1,855                 78(4)                (1,076)(3)             $1,548

Year ended
December 31, 1993                   $798                893                 30(4)                (1,030)(3)               $691

</TABLE>

(1) Actual return activity
(2) Accounts written off
(3) Obsolete Inventory written off
(4) Inventory Adjustments